Hong Kong signals wider Connect scheme, counting on Chinese funds to get stock market's mojo back after raising stamp duty

Enoch Yiu enoch.yiu@scmp.com
·5 min read

Hong Kong will expand its market reforms and cross-border investment channels with Shanghai and Shenzhen to tap investment from the world's second-largest capital market, as the city battens down the hatches to raise funds for government coffers through a 30 per cent hike in trading stamp duty.

The city government will speed up the creation of a southbound Bond Connect for Chinese funds to tap Hong Kong's debt market. A HK$40 billion (US$5.2 billion) minimum valuation to qualify companies for secondary listings on the city's stock exchange may also be lowered, Financial Secretary Paul Chan Mo-po said in his annual budget speech on February 24 .

"Hong Kong's stock market can compete with quality, [instead of] low cost, so we do not need to be the cheapest market but we need to make sure we are the best," said Christopher Hui Ching-yu, Secretary for Financial Services and the Treasury (FST), during a post-budget press briefing. "The market reforms and expansion of cross-border Connect schemes will enhance the competitiveness of Hong Kong's market as a listing venue for Chinese companies, and [make the city more attractive] for mainland and international investors to invest in."

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Hui's comment underscores how investors have mostly shrugged aside the knee-jerk reaction after the government's first increase in stock trading stamp duty in nearly three decades. Hong Kong's stock market turnover fell 27 per cent on Thursday to HK$256.8 billion in an advancing market - close to its daily January average - from a record HK$354.33 billion on budget day, as shares from Alibaba Group Holding to Tencent Holdings rose. Hong Kong Exchanges and Clearing Limited (HKEX), the city's stock market operator, fell 1.8 per cent, extending the 8.8 per cent decline from Chan's stamp duty announcement.

Secretary for Financial Services and the Treasury Christopher Hui Ching-yu, at the Central Government Offices in Tamar on June 5, 2020. Photo: Jonathan Wong alt=Secretary for Financial Services and the Treasury Christopher Hui Ching-yu, at the Central Government Offices in Tamar on June 5, 2020. Photo: Jonathan Wong

The stock exchange will study how it can relax its listing regulations so that companies with less than the valuation threshold listed on overseas exchanges - even those beyond the much sought-after "innovation" classification - can raise funds in Hong Kong via secondary listings. Non-technology Chinese companies may also be considered for qualifying to raise capital.

Hong Kong's securities regulator and the market operator pushed through a series of listing reforms in 2018 to allow companies with weighted voting rights (WVRs) and pre-revenue biotechnology research teams to raise capital in the city. As many as 43 companies raised a total of HK$420 billion since the 2018 rule changes, about 40 per cent of all IPOs in the city during the period, adding HK$11 trillion in market capitalisation to Hong Kong.

The reform, the most significant change to listing rules in three decades, attracted Alibaba, NetEase, JD.com and dozens of biotech companies to raise capital, helping to propel Hong Kong to the top of the world ranking as the preferred destination for initial public offerings (IPOs). In the process, HKEX's shares more than doubled over 12 months to become the world's most valuable exchange operator, beating CMG that operates the Chicago Mercantile Exchange and Intercontinental Exchanges that runs the New York Stock Exchange.

"The stock exchange will have a consultation on how to further expand the secondary listing regime," Hui said. "We want to further reform the listing regime to attract more companies to list here."

Futures contracts and other financial derivatives for China's yuan-denominated A shares, as well as an ETF Connect for mainland capital to trade exchange-traded funds in Hong Kong will also be examined, Hui said. The Hong Kong Monetary Authority (HKMA) will work with the Chinese financial regulators to introduce a so-called southbound channel in the Bond Connect to let Chinese capital tap Hong Kong's bond market, he said.

"The various Connect schemes linked international investors with the mainland markets, while letting mainland investors trade in Hong Kong stocks and bonds," he said. "A Wealth Management Connect will launch soon, and we will explore other potential new connect schemes."

Hong Kong's benchmark Hang Seng Index, which plunged 3 per cent on budget day, will always bounce back, Hui said, as shown by the 1.2 per cent recovery the next day.

"While Hong Kong may have a stamp duty on stocks trading, but it does not [levy] any capital gains tax or dividend tax," he said.

The duty on any trade will rise to 0.13 per cent for both the buyer and seller, from 0.1 per cent, or a total of 0.26 per cent for a transaction, Financial Secretary Paul Chan Mo-po said in his February 24 budget speech. That means an extra HK$600 in duties flowing into the city's coffers for every HK$1 million (US$129,000) worth of stocks changing hands.

The government's budget also announced the payment of HK$5,000 through consumption coupon to the city's permanent residents. Hui said the government will work with electronic payment companies to work out the details on the best way for the public to use the coupons to stimulate consumption.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

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