Changes to Hong Kong-mainland China tax treaty tipped to boost stocks turnover
Fresh changes to tax pact between Hong Kong and mainland China likely to push up volumes on through train and attract fund houses
Local fund managers and professionals believe the newly signed changes to the tax treaty between Hong Kong and mainland China will boost turnover in the Shanghai-Hong Kong stock connect scheme and attract more international fund houses to the city.
Hong Kong and mainland China signed changes to a double taxation treaty so that Hong Kong-based investors and funds would be exempt from paying the mainland's withholding tax. The city does not have such a tax.
"This is definitely good news for the stock through train by removing the uncertainties faced by fund managers," said Eleanor Wan, the chief executive of BEA Union Investment Management.
Cross-trading with a quota between Shanghai and Hong Kong kicked off on November 17. The southbound train allows mainland investors to invest up to 10.5 billion yuan (HK$13.2 billion) a day or 250 billion yuan in total, in Hong Kong stocks. The northbound train allows international investors to trade up to 13 billion yuan a day, or 300 billion yuan in total, in Shanghai-listed A shares.
Turnover since has not been as good as expected. The northbound investors have used only a third of the quota while the southbound flow has only used about 10 per cent. Many fund managers blamed the tax as partly responsible for the reluctance of investors to pour money into the scheme.
As a temporary measure to address the issue, Beijing has given tax waivers lasting three years for traders taking part in the scheme.
"The waiver only last for three years. Now, with the tax treaty amendment, fund managers can be assured they would not need to pay the tax as long as they are based in Hong Kong. This would help in the better management of our cost and the management of investment strategies," Wan said.
"The new amendment will also be a big boost for the Hong Kong fund industry as a whole as it means international fund houses which decided to set up their fund companies in Hong Kong will enjoy the tax exemption for them to invest in China. This will make Hong Kong become a more attractive market for international fund companies to do their business."
Stockbrokers said the deal with Beijing would bolster turnover and prepare for the launch of another stock market connect linking Hong Kong with the Shenzhen Stock Exchange later this year.
"Tax uncertainty is a major issue for asset managers. The tax policy of mainland authorities has not been clear," said Karl Paulson Egbert, a partner at US law firm Dechert. "Reducing tax uncertainty helps managers accurately assess the investment opportunity on the mainland. That's not just hype - there is a concrete need for certainty."