Hong Kong, reeling under its longest recession on record, will hike a tax on stock trading, dimming the earnings outlook for the city's stock exchange operator and sending its shares lower.
As the exchange posted record profits on high trading volumes, Hong Kong Financial Secretary Paul Chan said in his annual budget speech on Wednesday that the stamp duty on stock trading would rise as the government seeks to boost revenues.
The announcement sent shares in Hong Kong Exchanges and Clearing (HKEX) down 11%. Its shares closed down 8.8% at HK$509, the biggest daily percentage fall in five-and-a-half years.
The city's budget deficit is expected to hit a record HK$257.6 billion ($33.2 billion) for 2020/21.
The stamp duty on stock trading will rise to 0.13% of the value of the transaction on Aug. 1, Chan said, from the current 0.1%.
Buyers and sellers of securities listed in Hong Kong pay the duty, though certain products, such as exchange-traded funds and derivatives, are exempt. Trading revenue is the largest contributor to HKEX's income.
HKEX was not consulted about the increase in stamp duty, Calvin Tai, the company's interim CEO told media, saying it was too early to assess the impact of the change.
A spokesman for HKEX said earlier it was disappointed about the government's decision but "we recognise that such a levy is an important source of government revenue".
"Despite the strong earnings, we think the news on the stamp duty tax hike could impact earnings and sentiment on HKEX in the near term," analysts at Morgan Stanley wrote in a note.
Other major global trading centres such as the United States and Japan do not impose stamp duties on stock trading.
Citi analysts estimated that the increased stamp duty would result in a hit to the exchange's earnings per share of between 3% and 7%.
Hong Kong will raise HK$51 billion ($6.6 billion) from the current rate of stamp duty on stock trading in the 12 months to the end of March, and HK$59 billion in the fiscal year 2021-22 after the increase, according to official data, accounting for nearly 10% of total government revenue.
MAINLAND FLOWS REVERSE?
Earlier HKEX had posted a 23% jump in 2020 net profit, buoyed by higher trading volumes due to coronavirus-driven market gyrations. Schemes linking it with mainland China also boosted trading.
The net profit of HK$11.51 billion ($1.48 billion) for the year ended Dec. 31 was a third straight year of record profits.
Average daily turnover of equity products traded on the Hong Kong exchange rose 60% in 2020, its results filing showed.
That increased further in 2021 - average daily turnover in January was HK$245.7 billion, more than double a year ago and nearly five times that of the London Stock Exchange, helped by record flows of mainland cash into Hong Kong-listed firms.
Mainland buyers invest via the Stock Connect trading scheme, linking the Chinese-ruled city with the Shanghai and Shenzhen exchanges.
Boosted by increased inflows, HKEX's own shares reached an all-time high on Monday. Even after Wednesday's tumble, their price has doubled since the start of 2020.
Refinitiv data, however, showed outflows of HK$13 billion through Stock Connect on Wednesday as mainland investors dumped shares after the stamp duty announcement.
GEO Securities chief executive Francis Lun said the rise in the stamp duty would not hurt the ordinary investor, as it would only mean an extra HK$30 for every HK$1 million worth of trades.
But Kingston Securities executive director Dickie Wong said stock connect trading could be affected by the increased stamp duty.
"If there are stocks that are listed in both Hong Kong and mainland China and they are trading at similar valuations, why trade the Hong Kong stock?" he said.
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