If the stamp duty is abolished, will Hong Kong stocks rise sharply in the short term?

Source: Guotai Junan Daiqing, etc.

The feasibility of adjusting the stamp duty on Hong Kong stocks is currently being discussed in the market.

Regarding the reduction of stock stamp duty, on August 16, 2023, Charles Li, CEO of Hong Kong Exchanges and Clearing Limited (HKEX), stated that the previous increase in stock stamp duty had increased the tax revenue of the Hong Kong Special Administrative Region (HKSAR) government, which was a measure taken to increase revenue during the epidemic prevention and control period. Whether the stock stamp duty will be reduced in the future depends on the HKSAR government.

On August 27, Carrie Lam, Chief Executive of the HKSAR, stated that a working group will be established by the Financial Secretary to study how to increase the liquidity of the stock market. After the announcement, the market started discussing the subsequent adjustment of the stock stamp duty.

One of the reasons proposed is that in today's highly competitive financial market, countries tend to reduce transaction costs.

Historical review of the adjustment of stock stamp duty and the performance of Hong Kong stocks

In history, the stock stamp duty in Hong Kong has been adjusted three times downward and once upward. Let's review the performance of the Hong Kong stock index and industries during the increase in stamp duty in 2021 and the two decreases in stamp duty in 2000 and 2001.

1. In 2021, the stock stamp duty in the HKSAR was increased. The news was first reported in February, and the major Hong Kong stock indices adjusted accordingly. The Hang Seng Index fell by 2.99%, and the Hang Seng Tech Index fell by 5.10%. Semiconductors and finance were the biggest decliners. In June, the legislation was passed, and the decline in the Hong Kong stock index was smaller compared to February, with semiconductors and healthcare leading the decline. In August, the stock trading stamp duty in Hong Kong was officially increased, but the impact had already been "digested" by the market, and the index rose, with food retail, automotive, materials, and finance performing well.

1. In 2000 and 2001, the stock stamp duty in the HKSAR was reduced. On the first trading day after the reduction in 2000, most industries rose, with the technology hardware and equipment, durable consumer goods, and semiconductor sectors leading the gains. Starting from T+10, the industries that had previously performed well began to experience a slight correction, while those with smaller gains started to make modest gains. By T+20, most industries had turned downward. In 2001, within 20 trading days after the reduction, the software and services sector saw a significant increase.

1. From 2000 to 2008, the stamp duty on A-shares was reduced four times, and the Hang Seng Index experienced a certain degree of increase after the two reductions in 2001 and 2008.

If the stamp duty is abolished, it may provide a short-term boost to Hong Kong stocks.

Hong Kong Stock Stamp Duty Exceeds HKD 30 Billion Annually, a Significant Source of Government Revenue.

In retrospect, the abolition of stamp duty would to some extent enhance the attractiveness of Hong Kong stocks. In the medium to long term, we need to rely on the continued recovery of the domestic economy to support the development of the Hong Kong stock market.

1. Lower transaction costs and increased attractiveness of Hong Kong stocks. The abolition of stock transaction stamp duty would significantly reduce the transaction costs of Hong Kong stocks, thereby enhancing their appeal to domestic and foreign capital.

2. Boosting liquidity in the Hong Kong stock market. The abolition of stamp duty or reduction in taxation would provide support for liquidity in the Hong Kong stock market.

3. Increasing the activity of high-frequency trading. The abolition of stamp duty would to some extent affect investors engaged in programmatic and quantitative trading, making their trading more active.

4. Transaction costs only have a short-term impact. The main driving force behind the rise of Hong Kong stocks is the recovery of the domestic economy and improvement in corporate profits.

Investment Strategy for the Second Half of the Year in Hong Kong Stocks

Strategic Considerations: Some foreign investors are extrapolating the temporary weakness of the domestic economy, centralizing marginal issues, prolonging short-term problems, and systematizing localized problems. We believe that with the expectation of domestic policies heating up and the end of the Federal Reserve's interest rate hike cycle, there may be an upward revision process. During a larger box-shaped oscillation market, it is recommended to switch investment strategies.

Direction: During the rebound, focus on the Hang Seng Tech Index and sectors such as internet retail. Also, pay attention to the valuation advantages of the real estate chain in the Hong Kong stock market. After the weak recovery expectations are largely priced in, allocate more to stable high-dividend stocks and medium-to-high valuation varieties that we are optimistic about in the long term, such as communication operators and petrochemicals, in order to adapt to the characteristics of the times. At the same time, with a global perspective, examine investment opportunities in Hong Kong stocks, focusing on varieties that resonate with the global economic cycle and have improved liquidity, such as copper, gold, semiconductors, consumer electronics, and innovative pharmaceuticals.