Hong Kong moved unexpectedly to raise taxes on share trading by 30%, putting a damper on the city’s stock-exchange operator just as it was unveiling record annual sales and profits.
A surge in trading and new listings has buoyed
, which has grown to become the world’s largest exchange operator based on its own market valuation, and the fourth-biggest by value of companies listed on its exchange.
The group’s ascendance also reflects the rise of China’s financial markets to become some of the world’s biggest and most important after those in New York.
On Wednesday, however, Hong Kong’s government spoiled what should have been a victory lap for Hong Kong Exchanges, which owns and operates the city’s only stock and futures exchanges, and their clearinghouses. The government appoints half of the independent directors on the company’s board, including its chairman, and holds a stake in the business.
Paul Chan, the city’s financial secretary, proposed lifting the so-called stamp duty on stocks to 0.13% from 0.1%, as part of Hong Kong’s annual budget. The increase, which is the first in nearly three decades, would effectively add $3 to the cost of each $10,000 of stock traded, for both buyers and sellers. Some securities are exempt.
The looming tax increase pummeled Hong Kong Exchanges shares, even as it reported the equivalent of $1.48 billion in net profit for 2020, a 23% increase and its biggest-ever haul. The company’s stock, which has recently hit record highs, fell as much as 12% before paring some losses to close 8.8% lower. The city’s benchmark Hang Seng Index, which recently hit its highest since June 2018, fell 3%.
“We were not consulted on this. We received it together with the public,” said Calvin Tai, the interim chief executive of Hong Kong Exchanges. He said the group was disappointed but understood the government’s rationale, and that the most important thing was to ensure Hong Kong remained a preferred center for trading, capital-raising and risk management.
The increase will most affect quantitative funds, which make up 10% to 20% of trading in Hong Kong, Citigroup analysts said in a note to clients. It could cut Hong Kong Exchanges’s daily trading volumes by 10% and earnings per share by about 5%, they wrote.
The tax increase will also likely hurt smaller brokerages and individual investors who make daily bets on stocks, said Christopher Cheung Wah-fung, chief executive officer of Christfund Securities and a lawmaker who represents brokerages in Hong Kong.
Still, he said it was unlikely to affect Hong Kong’s overall competitiveness, given the city doesn’t impose capital-gains taxes. “It’s a way for the government to generate more immediate income amid rising trading volumes, as it needs to offer more handouts amid the economic downturn,” Mr. Cheung said.
Mr. Chan, the financial secretary, said in his budget speech that the government had considered the impact on the market and the city’s international competitiveness, and would continue to develop the securities market. Hong Kong is reeling from the effects of the pandemic and earlier social unrest, with its economy shrinking by a record 6.1% last year.
Stock trading in Hong Kong has boomed recently, hitting a fresh record on Monday, with the equivalent of $39 billion of main-board shares changing hands. The government earned about HK$33.2 billion, the equivalent of $4.3 billion, through stamp duties on stocks for the fiscal year ended March 2020.
Mainland Chinese investors have helped bolster activity, pouring money into Chinese stocks that are cheaper, or only available, in the offshore market. In January, such buying through a trading link known as Stock Connect hit $40.1 billion, according to data provider Wind, the highest monthly total since the program began in 2014. On Wednesday, they pulled $2.6 billion from the Hong Kong market, a record daily outflow.
“The increase in stamp duty, while unpleasant, is immaterial to investors who want exposure to Hong Kong-listed equities,” said Zhikai Chen, head of Asian equities at BNP Paribas Asset Management. Instead, he said investors should be mindful of the company’s rich valuation and potential competition from Shanghai and Shenzhen.
“The biggest challenge in the long run is how Hong Kong exchange can remain competitive relative to its mainland counterparts and whether Hong Kong is still seen as a capital-market conduit between the rest of the world and China,” Mr. Chen said.
Before Wednesday’s selloff, the exchange operator’s shares traded at 49 times forecast earnings for the next 12 months, according to FactSet. That compares to 22.5 times for Intercontinental Exchange Inc., the parent of NYSE.
Write to Joanne Chiu at [email protected]
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