How can we improve the liquidity of Hong Kong stocks besides reducing stamp duty?

Source: Xingye Securities, Zhang Bo

On August 27th, Hong Kong Chief Executive Carrie Lam announced that a working group led by the Financial Secretary will be established to study how to increase liquidity in the stock market.

Xingye Securities believes that there are two possible ways to increase liquidity in the Hong Kong market.

1. HKEX continues to promote IPO reforms to attract new economy companies and Chinese concept stocks for secondary listings in Hong Kong.

High-quality listed companies drive investors' willingness to participate in market transactions. Following the modification of the main board listing rules by HKEX in 2018, allowing emerging innovative companies with dual-class share structures and unprofitable biopharmaceutical companies to list in Hong Kong, and allowing qualified Chinese and international companies to conduct secondary listings in Hong Kong, on October 19, 2022, HKEX published a consultation paper proposing to expand the existing listing regime in Hong Kong to allow special purpose technology companies to list in Hong Kong.

2. The Hong Kong government considers adjusting the stamp duty level in the Hong Kong market at an appropriate time.

1. Currently, the stamp duty rate in the Hong Kong market is the same as in 1993. Reviewing the stamp duty rate in the Hong Kong market, we found that since 1993, the stamp duty rate in the Hong Kong market has undergone three downward adjustments and one upward adjustment. On April 1, 1998, April 7, 2001, and September 1, 2001, the stamp duty rate in the Hong Kong stock market was successively reduced from 0.15% in 1993 to 0.125%, 0.1125%, and 0.1%. On August 1, 2021, due to the impact of the COVID-19 pandemic on the economy, the stamp duty rate in the Hong Kong stock market was increased to 0.13% and has remained at this level.

1. The Ministry of Finance and the State Taxation Administration of China announced that starting from August 28, 2023, the stamp duty rate for securities transactions in the A-share market will be reduced from 1‰ of the transaction value on the seller's side to 0.5‰. The reduction in stamp duty rates may help boost market confidence in the short term and reduce transaction costs in the medium to long term, thereby enhancing market liquidity.

Investment Recommendations

If the stamp duty rate in the Hong Kong stock market is reduced and liquidity is improved, it is recommended to pay attention to HKEX (00388.HK), which directly benefits from the increased trading activity in the Hong Kong stock market.

The financial sector, as an industry with a strong beta attribute, will also benefit.