HONG KONG -- Hong Kong's stock exchange operator on Wednesday posted a record profit for the third consecutive year, but the announcement was overshadowed by a government plan to increase the tax on stock trades for the first time in 28 years.
With brokers forecasting a drop in trading volumes and up to a 7% erosion in profit for Hong Kong Exchanges & Clearing, shares of the world's most valuable market operator slumped as much as 12.3% Wednesday afternoon, their biggest plunge since October 2008. The stock closed 8.8% lower at HK$509.
The benchmark Hang Seng Index finished 3% lower, its steepest tumble since last May. Mainland investors turned net sellers of Hong Kong-listed shares for the first time in two months, dumping a record $19.95 billion Hong Kong dollars ($2.6 billion) worth of local shares through the Stock Connect channel, which allows Chinese investors to buy shares listed in the city.
Hong Kong Financial Secretary Paul Chan, who unveiled a stimulus plan worth HK$120 billion to try to bring the economy out of two years of recession, said in his budget speech on Wednesday that the transaction tax levied on stock trades, known as the stamp duty, would increase to 0.13% from 0.1% starting Aug. 1.
Citigroup analysts said the rate increase would likely reduce market volume on HKEX and trim earnings by 3% to 7%. They estimate that trading costs on HKEX, which include brokerage fees, bid-ask spreads and the stamp duty, now represent 0.2% to 0.5% of transaction value.
The announcement of the stamp duty increase came on the same day HKEX announced that its net profit rose 23% to a record HK$11.5 billion in 2020, boosted by a 60% jump in stock trading.
"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," said a spokesman for the exchange, which is partly owned by the government. "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."
Chan is seeking to rein in Hong Kong's budget deficit, which is forecast to reach a record HK$257.6 billion in the fiscal year ending March 31. The coronavirus pandemic and social unrest over the past two years have weighed on the economy and government revenues while the government has ratcheted up public spending. The deficit is estimated to narrow to HK$101.6 billion in the fiscal year beginning April 1.
The government originally estimated that it would collect HK$35 billion in stock transaction levies this fiscal year. In the budget announcement on Wednesday, Chan raised the estimate for total stamp duty collections, which also include taxes on property transactions, to HK$79 billion, HK$4 billion more than his previous estimate, due to higher stock trading volume, without breaking down the figures.
For the next fiscal year, the government expects stamp duty collections to rise to HK$92 billion, driven largely by the rate increase for share-trading transactions. Other main tax rates were left unchanged.
"Having duly considered the impact on the securities market and our international competitiveness, we have decided to introduce a bill to raise the rate of stamp duty on stock transfers," Chan said in his speech. "The government will continue to spare no efforts in introducing measures to facilitate the development of the securities market."
Hong Kong stands alone among the world's largest stock-trading centers in imposing such a levy on investors, who face no such tax in the U.S., Japan and Singapore, though the city does not tax capital gains or dividends.
The stamp duty increase "damages Hong Kong's status as an international financial center," said Christopher Cheung, chief executive of Christfund Securities and the lawmaker representing the brokerage industry. "The increase in stamp duty is definitely not worth the gain."
The stamp duty on stock transactions was last raised in 1993 to 0.15%. It was then cut in 1998 to 0.125% and again in 2000 and 2001 to the current level of 0.1%.
Shujin Chen, an analyst with Jefferies in Hong Kong, warned of concerns the government might raise duty rate again given Chan's deficit projections or to address worries about market overheating.
"Stamp duty rate has been used as a means to adjust the stock market in mainland China, so there is concern it may be the same for Hong Kong in future," she said in a client note.
Additional reporting by Stella Wong.