HKEX File Photo

Hong Kong Exchanges and Clearing (HKEX), the operator of Hong Kong's stock exchange, on Wednesday revealed record earnings for 2020, in the latest sign of the city's resilience as a global financial hub despite the complicated global environment.

However, the stellar data failed to underpin the shares of HKEX, as an unexpected announcement of a local government plan for a 30-percent increase in the city's stamp duty on stocks trading hammered the market. Industry observers have mixed views on the repercussions of the proposed tax hike.

HKEX's net profits jumped 23 percent year-on-year to a record high of HK$11.5 billion ($1.48 billion) in 2020. Revenue and other income, cash market turnover, and bond connect and stock connect volumes all set new records.



The strong year was also attributed to a buoyant IPO market, with a good number of Chinese mainland-based companies seeking primary or secondary listings in Hong Kong.

The city ranked No.2 in the global IPO market last year in terms of the amount of funds raised, HKEX Interim Chief Executive Calvin Tai told a media briefing via teleconference after the closing bell on Wednesday.

"Looking ahead, global financial markets will continue to be shaped by the impact of the coronavirus pandemic, ongoing geopolitical tensions, US-China trade relations and the anticipated economic recovery," HKEX said in a statement announcing the results, highlighting its "unique position as both a destination market and gateway" to Chinese mainland.

The HKEX recently became a minority shareholder of Guangzhou Futures Exchange Co, a newly created futures exchange in the Guangdong-Hong Kong-Macao Greater Bay Area.

The local market got off a good start this year, buoyed by a continued influx of money via the stock connect scheme between the Hong Kong and the mainland bourses.

Hong Kong's market capitalization totaled HK$50.7 trillion at the end of January, up 41 percent year-on-year, HKEX statistics showed. Average daily turnover was HK$245.7 billion in January, up 136 percent from the year before.

The numbers failed to offset the impact on HKEX shares of Hong Kong Financial Secretary Paul Chan Mo-po's announcement about a government proposal to raise the stamp duty on stock transactions to 0.13 percent. The rate has been 0.10 percent since September 2001. 

HKEX shares plunged over 10 percent when the afternoon session began and closed down 8.78 percent. The Hang Seng Index shed nearly 3 percent to finish below 30,000 points. The sell-off also sent panic through the A-share market, with the flagship Shanghai Composite Index losing 2 percent and the tech-heavy ChiNext index falling 3.37 percent.

The tax hike proposal caught the market off guard, triggering a wild selloff and sending HKEX shares plunging, Wu Jinduo, head of fixed income at the research institute of Great Wall Securities, told the Global Times on Wednesday.

"For one thing, the proposed stamp duty hike is intended to curb the overheated stock market as compared with Hong Kong's real economy. The move would help shore up the government's tax revenues and offset its fiscal deficit caused by the fallout of COVID-19 in 2020," she said, and a rise in stamp duty could also improve the local income distribution.

The stamp duty hike is aimed at increasing the local government's coffers and reducing deficits, and the 30-percent rise, albeit seeming substantial, doesn't change the fact that the stamp duty remains categorized as a low-rate tax item, which won't have a big impact on traders, Raymond Deng, investment strategist and CIO of consumer investment and insurance products at DBS Bank, told the Global Times on Wednesday.

The Hong Kong market's daily turnover set a new high of HK$353 billion on Wednesday, with net outflows hitting close to HK$20 billion, reversing several months of net inflows. 

"While 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," an HKEX spokesperson told the Global Times.

The company looks forward to continuing to work closely with all its stakeholders to drive the continued success, resiliency, vibrancy and attractiveness of the city's capital markets, the spokesperson said.

Stamp duties accounted for roughly 10 percent of HKSAR government's revenue in the last fiscal year, and about half of the stump duties came from the levy on stock trading.

In his budget speech on Wednesday, Chan forecast improved revenue for the next fiscal year. He predicted that the 2021-22 fiscal deficit will hit HK$101.6 billion, or 3.6 percent of local GDP, citing "counter-cyclical fiscal measures and the continued increase in recurrent expenditure." 

Hong Kong's GDP contracted by 6.1 percent in 2020, Chan said, but economic growth is estimated to hit 3.5-5.5 percent in 2021. As part of efforts to stabilize the local economy, Chan offered HK$5,000 in electronic consumption coupons in installments to all adult permanent residents. 

Tai told reporters that it will take time for the market to digest the stamp duty hike and there's no need to overreact, as the attractiveness of the local market is buttressed by costs as well as multiple other factors, including the quality of listed firms. 

The hike is unlikely to come into effect within the next few months as it still needs to go through legislative procedures, the HKEX said.

The 30-percent tax hike is a prudent approach to raising the stump duty on stock trading that factors in the tolerance of average investors, Wu said. Its impact would eventually be fully digested by the market. 

"What matters most to the long-term development of Hong Kong shares remains corporate earnings. The weight of mainland companies in the Hang Seng Index and the Hang Seng TECH Index continues to increase, and the mainland economy has taken the lead in work and production resumption, with corporate earnings estimates continuing upward, boding well for the Hong Kong market in the long run," Deng said.

In a report on Wednesday, BofA Securities said the Hong Kong market is one of the major markets globally with the highest trading costs, and the impact on the HKEX's short-term turnover of the proposed stamp duty hike would be neutral as the local market remains robust. 

High trading costs augur ill for the HKEX to expand and attract investors over the long term, however, the firm said.