Hong Kong should cut stamp duty, relax listing rules to reinvigorate sluggish stock market, say brokers

Their calls came after Chief Executive John Lee said on Sunday that the city’s financial secretary will set up a task force to study ways to increase stock market activity
Average daily stock market turnover in the first half of this year was down 39 per cent from 2021, before the stamp duty was raised by almost a third

HKEX

Enoch Yiu

Published: 6:30pm, 28 Aug 2023

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Hong Kong should follow mainland China’s lead in cutting the stamp duty payable when shares change hands, or scrap the levy entirely for a period of time, to boost low market turnover, according to brokers and analysts.

They also called for bourse operator Hong Kong Exchanges and Clearing to relax its rules to attract more new listings.

Their calls came after Chief Executive John Lee Ka-chiu said on Sunday that the city’s financial secretary will set up a task force to study ways to increase stock market activity and boost other areas of the capital market.

Stock market turnover declined markedly after the government increased the stamp duty from 0.2 per cent to 0.26 per cent in August 2021. The move aimed to help finance measures designed to support small businesses and other public expenditures during the coronavirus pandemic.

The average daily turnover stood at HK$115 billion (US$14.66 billion) in the first half of this year, down 16 per cent from a year ago and 39 per cent from the first half of 2021, before the levy was raised, HKEX data shows.

“In 2021, Hong Kong increased the stamp duty by 30 per cent to support the many relief measures during the Covid pandemic,” said Rex Ho, a tax partner at accounting firm PwC. “Now that Covid is over and the stock market turnover has slumped, it is time to cut the stamp duty back, or go even further.”

Hong Kong now charges a stamp duty of 0.26 per cent per trade, which is equally split between buyer and seller. It is the second-highest among all stock markets worldwide, behind only the 0.5 per cent charged in Britain. Countries such as the US and Japan do not charge any stamp duty.

“A cut, or even an exemption, of the stamp duty on certain stock transactions can send a strong signal to the world that Hong Kong is keen to attract international investors to trade here to enhance the city’s status as an international financial centre,” Ho said.

Mainland China on Monday halved the stamp duty it charges on stock trades to 0.05 per cent. The effect was immediate, with shares in Hong Kong and mainland China to jumping by the most in five weeks.

“The [move] has generated expectations among investors that the Hong Kong market may follow,” said Kenny Ng Lai-yin, a strategist at Everbright Securities International. “Reducing stamp duty … can enhance active trading in the Hong Kong stock market.”

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Hong Kong should also consider offering a tax holiday – ceasing to collect stamp duty altogether for six to 12 months – said Robert Lee Wai-wang, the lawmaker for the financial services sector and CEO of local brokerage Grand Capital Holdings.

“Cutting down the stamp duty may not solve all problems, because the market downturn is due to geopolitical tensions and other macroeconomic problems,” he said. “However, lower transaction costs can help Hong Kong to compete with other markets.”

David Friedland, managing director for Asia-Pacific at Interactive Brokers, described the stamp duty as a “major frictional cost”, adding that “any reduction will lead to an increase in turnover.”

For some, the answer is listing reforms. Measures such as lowering the profit requirements for new listings would inevitably attract new flotations, which in turn would lead to higher turnover. said Stephen Hui Chiu-chung, CEO of Luk Fook Financial Services.

In January 2021, HKEX increased its profit requirements for new listing by 60 per cent. Companies seeking to raise funds on the main board must have earned at least HK$80 million in combined profits in the three years before listing, which is the highest worldwide.

“The bar is set too high, so many companies are not qualified to list in Hong Kong,” said Stephen Hui Chiu-chung, CEO of Luk Fook Financial Services. “This is one of the reasons the IPO market [has suffered].”

Funds raised from new share listings in Hong Kong dropped to a two-decade low in the first half of the year, pushing the city down to ninth place in a global ranking of IPO markets, according to data company Refinitiv.

There have been no new listings on the GEM, the stock exchange’s second board, for well over two years. Grand Power Logistics Group was the last, raising HK$55.5 million in January 2021.

Hui also urged the HKEX to relax its back-door listing rules to help companies with financial difficulties to find new buyers.

A back-door listing is when a company sells its major assets or shareholding, enabling the buyer to secure listing status without passing the normal application process. The new owner usually inject its own businesses into the existing entity.

The HKEX joined hands with the Securities and Futures Commission in recent years to crack down on back door listings in light of some problematic cases.

“The regulators could relax the rules to allow companies to conduct such activities in an appropriate manner,” Hui said.

For the Chamber of Hong Kong Listed Companies, cutting stamp duty would be no cure-all.

“The key is to continue efforts to attract new funding sources such as the Middle East and Southeast Asia,” said its CEO, Mike Wong.

“There should also be a review by the HKEX on how to provide more flexibility when it comes to asset injections by listed companies in order to rejuvenate trading.”