Will the world’s third-largest equity market wither as Hong Kong’s trading cost rises 30 per cent from August 1?

The Hong Kong government’s plan to raise the stamp duty on stock transactions would add 30 per cent to the cost of every trade, diminish the allure of what’s already one of the world’s most expensive major markets, investors and brokers said.

The duty on any trade will rise to 0.13 per cent for both the buyer and seller, from 0.1 per cent, or a total of 0.26 per cent for a transaction, Financial Secretary Paul Chan Mo-po said in his February 24 budget speech . That means an extra HK$600 in duties flowing into the city’s coffers for every HK$1 million (US$129,000) worth of stocks changing hands.

The first duty increase since 1993 could add HK$12 billion to the HK$30 billion that goes into the city’s coffers every year from market transactions, a 40 per cent annual revenue increase that is much needed by a government running a fiscal deficit to help Hong Kong survive its worst recession on record. Still, every extra dollar in trading cost makes the world’s third-largest stock market less attractive for the traders who sustain the vibrant activity, brokers said.

“It is just like killing the goose that lays the golden egg,” said Tom Chan Pak-lam, chairman of the Hong Kong Institute of Securities Dealers, the industry guild that represents the city’s stockbrokers. “The government’s assumption that the market would be immune to any increase in stamp duty [is misguided], as shown by the selling that started today. If the turnover shrinks, the government’s income will fall. The industry is very disappointed with the increase, because we have been asking for either a reduction or an abolition [of the existing stamp duty] since 2017.”

The government identified the stock trading stamp duty as the most viable revenue source with “the smallest impact” out of all potential income sources, according to a senior government source, adding that the aim of the stamp duty is not to hurt the city’s stock exchange or the market.

“The level of increase of the stamp duty is very modest and it will not add substantially to the transaction cost,” according to the source familiar with the government’s plans. “The losers will be those who leave Asia’s second-largest market, as many high-quality Chinese companies will continue to list in Hong Kong. It is an irreversible, historical trend.”