(Bloomberg) -- Hong Kong unveiled its first stamp-duty increase on stock trades since 1993, sparking a broad selloff in the $7.6 trillion market and sending shares of the city’s exchange to their biggest plunge in more than five years.
The planned trading-tax increase to 0.13% from 0.10% was part of a raft of new measures announced in Hong Kong’s budget that included increased spending to help residents weather the pandemic. Even as the city’s economy has plunged over the past year, stock prices and trading have surged amid a global market boom.
Hong Kong’s benchmark Hang Seng Index closed 3% lower on Wednesday, led by a 8.8% tumble in Hong Kong Exchanges & Clearing Ltd. That’s even after the bourse operator reported record annual earnings on Wednesday. Mainland-based funds sold a record $2.6 billion worth of Hong Kong stocks through exchange links with Shenzhen and Shanghai. That comes after 38 days of net purchases from north of the border.
Calvin Tai, HKEX interim chief executive officer, said in an earnings call that the bourse operator wasn’t consulted by the government on its decision to hike the stamp duty.
“The impact will be significant,” said Kingston Lin, managing director of the asset management department at Canfield Securities in Hong Kong, ahead of the announcement by the city. “The market is doing very well and, of course, it will bring more revenue to the government. But higher transaction costs will be a concern for the exchange.”
The government announced spending measures of more than HK$120 billion ($15.5 billion) to alleviate economic hardship for city residents struggling after a two-year economic recession.
The trading tax hike is due to be in place on Aug. 1 and the government expects it to generate an extra HK$12 billion a year, local media including Apple Daily and NowTV reported, citing unidentified people. In the 2019/2020 fiscal year, the duty contributed HK$33.2 billion in revenue.
The move risks damping a trading boom that has gripped the city and propelled earnings at the exchange. The bourse on Wednesday reported that profit rose 23% to a record HK$11.5 billion in 2020, helped by a 60% jump in stock trading. Its shares have surged about 150% from a low last year, making it the world’s biggest by market value.
“Whilst we are disappointed about the government’s decision to raise stamp duty for stock transactions, we recognize that such a levy is an important source of government revenue,” an exchange spokesperson said. “HKEX looks forward to continue working closely with all its stakeholders to drive the continued success, resiliency, vibrancy and attractiveness of Hong Kong’s capital markets.”
Analysts at Citigroup Inc. estimated that the increased stamp duty will raise trading costs by 6% to 15%, pressing down trading volumes and crimping the exchange’s earnings per share by 3% to 7%.
From the archive: Europe’s Tax on Trading Gets a Stay of Execution
Hong Kong is an outlier when it comes to taxing stock transactions, with markets such as the U.S. and rival Singapore refraining. Even so, talk of implementing a tax on financial transactions has recently been rekindled by some Democrats in the U.S. after the recent trading frenzy in GameStop Corp. shares.
(Adds comment from HKEX interim CEO in fourth paragraph)
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