The Hong Kong stock market is a market dominated by institutional investors. Institutional investors dominate the Hong Kong stock market. And institutional investors are more rational than small and medium investors, and are more able to face the fact of raising stamp duty openly, unlike small and medium investors who would choose to vote with their feet, resulting in unnecessary shocks in the stock market.
On the evening of June 2, the Legislative Council of the Hong Kong SAR passed the third reading of the Revenue (Stamp Duty) Bill 2021 to implement the proposal to raise the stamp duty on stocks to 0.13% in this year’s Budget, and the relevant adjustment will take effect on August 1 this year.
Raising the stamp duty on stocks, which is negative news for the capital market. And the stamp duty rate for Hong Kong stocks is raised to 0.13%, which also means that the stamp duty rate for Hong Kong stocks is raised by 30% from the existing 0.1%, which obviously constitutes a negative impact for Hong Kong stocks, and it is no wonder that the Hang Seng Index showed a kind of one-sided retracement today (June 3).
But how big is the impact of a 30% increase in stamp duty on Hong Kong stocks, which is a matter of concern. On the one hand, it is obvious that raising the stamp duty constitutes a negative impact on the market, after all, raising the stamp duty increases the investment cost of investors. But on the other hand, how big is the negative impact of raising the stamp duty, it is also necessary to be rational, the market does not need to enlarge this negative. In fact, the negative impact of raising the stamp duty is short-term and will not change the market trend in the medium and long term. What determines the medium and long-term trend of the stock market is determined by various comprehensive factors of the stock market fundamentals. As for the 30% increase in stamp duty on Hong Kong stocks, its impact on the market is still limited.
First of all, the motive of raising stamp duty on Hong Kong stocks is not to suppress the stock market. This is fundamentally different from the “midnight rooster” in 2007, when the Ministry of Finance announced that the stamp duty rate on securities transactions would be increased from 1‰ to 3‰ in the evening of May 29 (or early morning of May 30) in response to the speculative situation of junk stocks in the A-share market. Starting from the next day, the Shanghai index dropped from a high of 4335 to 3404 vertically within 5 trading days, a drop of more than 20%, and thousands of stocks staged a continuous tragic fall. It can be said that the purpose of raising stamp duty at that time was to suppress the atmosphere of speculation in the stock market. However, this increase in stamp duty for Hong Kong stocks is purely for the reason of increasing tax revenue.
According to the Hong Kong Secretary for Financial Services and the Treasury, Mr. Hui Ching-yu, the government’s decision to adjust the stamp duty on stock transactions this time is mainly from the perspective of raising government revenue in order to maintain sound public finances. In the face of the fiscal deficit of the HKSAR policy, there is a clear and continuing need for the government to improve its financial position in the face of the increasing pressure on public finances. Based on the average daily turnover of about $177 billion from the end of February to the end of May this year, the proposed adjustment to the stamp duty rate will generate additional revenue of about $18.7 billion per year for the Government to meet its fiscal expenditure. It is because the purpose and motive of raising stamp duty are different, therefore, its positive and negative impact on the market is also different.
Secondly, the impact of the news of stamp duty increase on the market is also “once and for all, again and again, but not always”. The news of the stamp duty increase in Hong Kong first came out on February 24 this year, and on that day, Hong Kong sank 914 points, or 2.99%. After a rebound the next day, it sank again on February 26 by 1093.96 points, a drop of 3.64%. Therefore, the news of raising stamp duty still brought a certain shock to Hong Kong stocks at that time. However, this time, after the draft of the stamp duty increase was formally passed, the impact on the market instead dropped a lot, and today (June 3) the Hang Seng Index fell just about 300 points, and the drop was only about 1%. It is foreseeable that by the time the policy of raising stamp duty is formally implemented on August 1 this year, its impact will be even more limited.
Third, the Hong Kong stock market is a market dominated by institutional investors, who occupy a dominant position in the Hong Kong stock market. And institutional investors are more rational than small and medium investors, and can face the fact of raising stamp duty more frankly, unlike small and medium investors who will choose to vote with their feet, resulting in unnecessary shocks in the stock market. So, when faced with a negative impact, institutional investors are more rational, which is also conducive to the stable development of the market and reduce the impact of negative news on the market.
Especially for medium and long term investments, the negative impact of raising stamp duty is still limited. Because medium and long term investors do not need to do transactions every day and do not need to trade frequently, so even if the stamp duty is raised by 30%, the impact on them is very small. For short term investors, if there is a suitable investment target, the increase in stamp duty will not be a factor that prevents investors from trading. A 30% increase in stamp duty is equivalent to an additional $30 per $100,000 of stock trading, which also does not constitute a disincentive to trading for investors seeking short-term profits. It can be said that investors who should trade will still trade and will not stop trading because of the 30% increase in stamp duty. Therefore, the impact of the 30% stamp duty increase on the Hong Kong stock market will be limited.