Restore a Future to the Securities Industry
Release Date: 2023-08-02
August 1, 2023
Published in August 2023, this article reviews the impact of the Hong Kong government's decision to increase the stock stamp duty by 30% (from 0.1% to 0.13% for both buyers and sellers) since August 2021. It's been two years since this policy was implemented, and the industry is currently in dire straits, necessitating an immediate review without waiting for year-end data.
Impact of Tax Increase on Revenue:
Table 1: Average Daily Turnover and Estimated Tax Revenue Before and After Stamp Duty Increase
According to data from the Hong Kong Stock Exchange (Table 1), the average daily turnover before the tax increase was approximately HKD 164.6 billion. However, in the first year after the tax hike, this figure dropped by 18% to about HKD 134.9 billion, and further declined by 17% to about HKD 112.6 billion in the second year. Despite an increase in the number of companies listed on the Hong Kong Stock Exchange, turnover did not rise, indicating a negative impact of the stamp duty increase on market transactions.
Additionally, actual stamp duty revenue fell short of government expectations. The first year after the tax hike saw revenue of approximately HKD 68.2 billion, only slightly above the pre-tax figure of HKD 67.7 billion. Disappointingly, revenue in the second year decreased by 19% to about HKD 55.4 billion.
The stamp duty on stocks differs from profit or salary taxes, as taxpayers have more choices. If investors find the tax burden too high, they may choose not to invest or move to more competitive stock markets. Therefore, the demand for stock transactions is highly price elastic, meaning tax increases do not equate to proportional revenue increases and may even result in reduced revenue.
The data shows that tax revenue did not increase significantly after the hike, and even saw a decline in the second year, far from the government's initial goal of an additional HKD 12 billion or even HKD 20 billion as some officials claimed. This has resulted in several negative impacts.
Impact on Market Health:
The tax increase has negatively affected the Hang Seng Index and average daily turnover. While the index is influenced by a variety of economic and external factors, transaction costs play a significant role in trade volume.
Due to the different fee structures of stock exchanges around the world compared to Hong Kong, some markets levy dividend or capital gains taxes, some charge based on the number of shares traded, and some only charge on buying or selling. Therefore, simply looking at the stamp duty rate does not directly indicate the level of transaction costs. Additionally, brokerage commissions are a variable that should be excluded. Thus, comparing total transaction costs excluding brokerage commissions is simpler and more practical. For example, using HKD 100,000 to trade blue-chip stocks in different countries, the total transaction cost (excluding commissions) for buying and selling Tencent in the Hong Kong market is about HKD 281; for the UK's Lloyds Bank, it's about HKD 516; for Germany's Deutsche Bank, about HKD 123; for Singapore's Seatrium, about HKD 86; for Japan's Lasertec Corporation, about HKD 5; and for Tesla in the U.S., only about HKD 1. In today's competitive financial market, countries are tending to reduce transaction costs, with even the Malaysian government lowering the stock stamp duty from 0.15% to 0.1%. In contrast, Hong Kong prides itself on a simple, low-tax system, but the data shows that our trading costs are among the highest globally, with the cost of trading blue chips being about 280 times higher than our main competitor, the U.S. The stamp duty is the main culprit of high costs, accounting for about 92.5% of the total fees.
Some people may think that a 0.13% tax rate is negligible in stock trading. Indeed, for investors using a buy-and-hold strategy, the long-term holding of stocks makes transaction costs very minimal over time, with little impact from the stamp duty. However, the market is not just for long-term investors; it includes many active traders, speculators, and funds with frequent trading. In financial markets, no one wants to be at odds with money. These investors choose markets based on where they can effectively implement their strategies with lower costs, not based on geography or rhetoric.
Both the Hong Kong and U.S. stock markets are mature and stable with their unique characteristics, but their transaction costs are vastly different. The high stock stamp duty in Hong Kong significantly affects these investors' trading strategies. For instance, the cost of a single trade in Hong Kong could allow them to execute 280 trades in the U.S. After considering costs, they may need to widen their bid-ask spread to profit, leading them to choose other markets with better cost efficiencies. Consequently, the Hong Kong stock market loses trading volume and depth, increasing the likelihood of slippage, reducing investment returns, prompting more investors to leave, and creating a vicious cycle. The decline in the average daily turnover of Hong Kong stocks is objective evidence.
Market depth is like the blood in a human body, continuously supplying oxygen to organs; only with good circulation can the body function well. Similarly, market depth is the lifeline of financial markets, providing liquidity, price stability, and trading efficiency. However, the Hong Kong government's tax increase on the core stock market has led to a lack of trading volume and depth, stagnant like a pool of dead water. Derivative products, financing activities, asset management, wealth management, and green finance are all closely tied to the stock market, and without market vitality, these financial activities cannot perform well.
Impact of Tax Increase on Industry Health:
Brokerage income mainly comes from trading commissions, interest income, IPO business, and service fees. However, in recent years, brokers have faced increasing regulatory and operational costs, fierce competition, decreased margin interest due to regulation, and the loss of IPO interest income with the launch of FINI. The remaining commission income is directly eroded by the stock stamp duty and indirectly affected by the reduced trading volume. According to the Securities and Futures Commission, the income of all exchange participants fell dramatically from HKD 27.4 billion in 2021 to HKD 5.6 billion in 2022. This rapid decline in industry income has led to the closure of 76 brokerages since the tax increase, compared to 21 in the year before. In September 2021, there were 12,152 licensed representatives and 2,144 responsible officers, but by March 2023, these numbers had dropped to 11,358 and 2,075, respectively. Job losses, retirements, career changes, and emigration have been common, with some brokers even delaying salary payments recently.
Reflecting on the Hong Kong government's abolition of the minimum commission system in 2003, the intention was to create a competitive environment benefiting investors. However, the recent increase in stock stamp duty contradicts this aim, reducing industry profitability and job security, and accelerating talent loss, affecting government salary tax revenue and increasing social costs.
A particularly concerning trend is the shrinkage among C-category brokerages. Their profits plummeted from a net profit of HKD 5.3 billion in 2021 to a net loss of HKD 4.2 billion in 2022, a decline of HKD 9.5 billion. This is primarily due to insufficient economies of scale to sustain operations in difficult environments, leading to closures. Those that survive tend to be larger institutions. In the financial industry, high market concentration often brings more drawbacks, potentially creating systemically important financial institutions (SIFIs) that are "too big to fail." If these institutions collapse, it will cause significant economic and social risks, with the public bearing the consequences. Such events, occurring during large-scale MPF redemptions, could severely impact retirees, the economy, and society.
Impact of Tax Increase on Hong Kong's Competitiveness
The industry has realized that relying solely on the Hong Kong stock market is no longer viable for survival. Simultaneously, there is a growing demand among investors for the U.S. market. To adapt, brokers have expanded their U.S. stock business, resulting in increased media coverage, more research reports on U.S. stocks, and a rise in discussions about U.S. stock performances among investors. Symbols like MSFT and TSLA have become familiar to local investors. Although there is no specific data to support these observations, they clearly reflect a trend in the securities industry over the past two years, which the government should pay attention to.
Over time, the trading volume, activity, and depth of the Hong Kong market have continued to decline. In contrast, the total transaction value in the U.S. increased by 14% from USD 133 trillion in the year before Hong Kong's stamp duty hike (August 2020 to July 2021) to USD 152 trillion in the year after (August 2021 to July 2022). A single U.S. stock, such as Tesla (TSLA), now has a daily trading volume equivalent to two to three times the entire Hong Kong market's daily turnover. Similar disparities are seen with companies like Alibaba, where U.S.-listed BABA shares trade at volumes several times higher than Hong Kong-listed 9988.HK shares.
Considering these factors, raising the stamp duty equates to Hong Kong undermining its own competitiveness. Ironically, it inadvertently benefits competitors by enhancing their market depth and growth, with the U.S. being the most obvious beneficiary. Our IPO market was even surpassed by Indonesia in early 2023. Despite government officials' claims that the stamp duty increase does not affect Hong Kong's market competitiveness, the reality is quite the opposite.
In summary, the increase in stock stamp duty has resulted in: 1) reduced rather than increased tax revenue; 2) impacted investor activity and income, affecting market trading volume and depth; 3) market contraction, creating more "too big to fail" systemic important financial institutions (SIFIs), increasing systemic risk; 4) job insecurity in the industry, accelerating talent loss, affecting government salary tax revenue and increasing social costs; 5) indirectly strengthening foreign competitors; and 6) undermining Hong Kong's competitiveness as an international financial center, affecting its strategic role as China's key international financial hub and slowing the internationalization of the RMB. These unintended consequences highlight the need for the government to closely monitor policy effectiveness and make timely adjustments.
The Hong Kong government's substantial pandemic spending has tightened its finances, so adopting various measures to increase revenue and maintain fiscal stability is understandable. However, the financial industry is a pillar of Hong Kong's economy, with the securities sector being a cornerstone. After years of economic downturn, the industry is weakened. Implementing tax increases in such conditions is akin to treating a critically ill patient; it requires careful monitoring and timely adjustments to avoid harming Hong Kong's competitiveness and strategic positioning.
The most disappointing aspect for the industry is the government's stance on this issue, as officials seem unwilling to acknowledge the impact of the stamp duty increase. Not only did they severely misjudge the effects on tax revenue and competitiveness at the outset, but even with 23 months of post-tax data available, they continue to manipulate figures to deny the facts. The government has misleadingly used indirect indicators like "turnover rate" to claim that the tax increase hasn't affected trading volumes. This rate slightly increased amid the Hang Seng Index's fluctuations, not because of active trading, but due to investors selling off and refraining from re-entering the market. Additionally, the government compared average daily turnover from 1998 to 2001, post-crash, with the volatile 1997 market to argue that tax cuts wouldn't boost trading, a comparison that lacks persuasiveness. Lastly, they blame low trading volumes entirely on external factors, ignoring the impact of transaction costs, which are under government control.
Many industry leaders and professionals have repeatedly expressed that the tax increase is unwise. However, the authorities remain unmoved, which contradicts the current government's stated commitment to listening and pragmatic governance and violates its policy to enhance competitiveness and solidify Hong Kong's status as a global financial center. Those in leadership positions should not cling to outdated policies and must be willing to adapt.
Hong Kong still holds many advantages, but we must not be complacent or self-deceiving. To solve problems, we must first recognize, understand, and accept the facts. The clear data show that the tax increase is ineffective and has far-reaching impacts, already causing significant harm. We urge the authorities to correct this immediately by reducing the tax rate to an internationally competitive level, safeguarding the future of Hong Kong's crucial financial and securities industries. With Hong Kong's strong market foundation, the resilience and efforts of industry elites, and national support, timely adjustments will ensure we can continue to thrive.
Thomas Ip, CFA FRM
Director
Hong Kong Securities and Futures Professionals Association
Sources: Hong Kong Stock Exchange, Securities and Futures Commission, IB, Yahoo, etc.
Published in August 2023, this article reviews the impact of the Hong Kong government's decision to increase the stock stamp duty by 30% (from 0.1% to 0.13% for both buyers and sellers) since August 2021. It's been two years since this policy was implemented, and the industry is currently in dire straits, necessitating an immediate review without waiting for year-end data.
Impact of Tax Increase on Revenue:
Table 1: Average Daily Turnover and Estimated Tax Revenue Before and After Stamp Duty Increase
| Period (HKD$ billion) | Avg. Daily Turnover | YoY Change | Estimated Tax Revenue | YoY Change |
| Aug 2020 - Jul 2021 (Before Tax Increase) |
164.6 | ／ | 67.7 | ／ |
| Aug 2021 - Jul 2022 (1st Year After Tax) |
134.9 | -18% | 68.2 | +0.7% |
| Aug 2022 - Jul 2023 (2nd Year After Tax) |
112.6 | -17% | 55.4 | -19% |
According to data from the Hong Kong Stock Exchange (Table 1), the average daily turnover before the tax increase was approximately HKD 164.6 billion. However, in the first year after the tax hike, this figure dropped by 18% to about HKD 134.9 billion, and further declined by 17% to about HKD 112.6 billion in the second year. Despite an increase in the number of companies listed on the Hong Kong Stock Exchange, turnover did not rise, indicating a negative impact of the stamp duty increase on market transactions.
Additionally, actual stamp duty revenue fell short of government expectations. The first year after the tax hike saw revenue of approximately HKD 68.2 billion, only slightly above the pre-tax figure of HKD 67.7 billion. Disappointingly, revenue in the second year decreased by 19% to about HKD 55.4 billion.
The stamp duty on stocks differs from profit or salary taxes, as taxpayers have more choices. If investors find the tax burden too high, they may choose not to invest or move to more competitive stock markets. Therefore, the demand for stock transactions is highly price elastic, meaning tax increases do not equate to proportional revenue increases and may even result in reduced revenue.
The data shows that tax revenue did not increase significantly after the hike, and even saw a decline in the second year, far from the government's initial goal of an additional HKD 12 billion or even HKD 20 billion as some officials claimed. This has resulted in several negative impacts.
Impact on Market Health:
The tax increase has negatively affected the Hang Seng Index and average daily turnover. While the index is influenced by a variety of economic and external factors, transaction costs play a significant role in trade volume.
Due to the different fee structures of stock exchanges around the world compared to Hong Kong, some markets levy dividend or capital gains taxes, some charge based on the number of shares traded, and some only charge on buying or selling. Therefore, simply looking at the stamp duty rate does not directly indicate the level of transaction costs. Additionally, brokerage commissions are a variable that should be excluded. Thus, comparing total transaction costs excluding brokerage commissions is simpler and more practical. For example, using HKD 100,000 to trade blue-chip stocks in different countries, the total transaction cost (excluding commissions) for buying and selling Tencent in the Hong Kong market is about HKD 281; for the UK's Lloyds Bank, it's about HKD 516; for Germany's Deutsche Bank, about HKD 123; for Singapore's Seatrium, about HKD 86; for Japan's Lasertec Corporation, about HKD 5; and for Tesla in the U.S., only about HKD 1. In today's competitive financial market, countries are tending to reduce transaction costs, with even the Malaysian government lowering the stock stamp duty from 0.15% to 0.1%. In contrast, Hong Kong prides itself on a simple, low-tax system, but the data shows that our trading costs are among the highest globally, with the cost of trading blue chips being about 280 times higher than our main competitor, the U.S. The stamp duty is the main culprit of high costs, accounting for about 92.5% of the total fees.
Some people may think that a 0.13% tax rate is negligible in stock trading. Indeed, for investors using a buy-and-hold strategy, the long-term holding of stocks makes transaction costs very minimal over time, with little impact from the stamp duty. However, the market is not just for long-term investors; it includes many active traders, speculators, and funds with frequent trading. In financial markets, no one wants to be at odds with money. These investors choose markets based on where they can effectively implement their strategies with lower costs, not based on geography or rhetoric.
Both the Hong Kong and U.S. stock markets are mature and stable with their unique characteristics, but their transaction costs are vastly different. The high stock stamp duty in Hong Kong significantly affects these investors' trading strategies. For instance, the cost of a single trade in Hong Kong could allow them to execute 280 trades in the U.S. After considering costs, they may need to widen their bid-ask spread to profit, leading them to choose other markets with better cost efficiencies. Consequently, the Hong Kong stock market loses trading volume and depth, increasing the likelihood of slippage, reducing investment returns, prompting more investors to leave, and creating a vicious cycle. The decline in the average daily turnover of Hong Kong stocks is objective evidence.
Market depth is like the blood in a human body, continuously supplying oxygen to organs; only with good circulation can the body function well. Similarly, market depth is the lifeline of financial markets, providing liquidity, price stability, and trading efficiency. However, the Hong Kong government's tax increase on the core stock market has led to a lack of trading volume and depth, stagnant like a pool of dead water. Derivative products, financing activities, asset management, wealth management, and green finance are all closely tied to the stock market, and without market vitality, these financial activities cannot perform well.
Impact of Tax Increase on Industry Health:
Brokerage income mainly comes from trading commissions, interest income, IPO business, and service fees. However, in recent years, brokers have faced increasing regulatory and operational costs, fierce competition, decreased margin interest due to regulation, and the loss of IPO interest income with the launch of FINI. The remaining commission income is directly eroded by the stock stamp duty and indirectly affected by the reduced trading volume. According to the Securities and Futures Commission, the income of all exchange participants fell dramatically from HKD 27.4 billion in 2021 to HKD 5.6 billion in 2022. This rapid decline in industry income has led to the closure of 76 brokerages since the tax increase, compared to 21 in the year before. In September 2021, there were 12,152 licensed representatives and 2,144 responsible officers, but by March 2023, these numbers had dropped to 11,358 and 2,075, respectively. Job losses, retirements, career changes, and emigration have been common, with some brokers even delaying salary payments recently.
Reflecting on the Hong Kong government's abolition of the minimum commission system in 2003, the intention was to create a competitive environment benefiting investors. However, the recent increase in stock stamp duty contradicts this aim, reducing industry profitability and job security, and accelerating talent loss, affecting government salary tax revenue and increasing social costs.
A particularly concerning trend is the shrinkage among C-category brokerages. Their profits plummeted from a net profit of HKD 5.3 billion in 2021 to a net loss of HKD 4.2 billion in 2022, a decline of HKD 9.5 billion. This is primarily due to insufficient economies of scale to sustain operations in difficult environments, leading to closures. Those that survive tend to be larger institutions. In the financial industry, high market concentration often brings more drawbacks, potentially creating systemically important financial institutions (SIFIs) that are "too big to fail." If these institutions collapse, it will cause significant economic and social risks, with the public bearing the consequences. Such events, occurring during large-scale MPF redemptions, could severely impact retirees, the economy, and society.
Impact of Tax Increase on Hong Kong's Competitiveness
The industry has realized that relying solely on the Hong Kong stock market is no longer viable for survival. Simultaneously, there is a growing demand among investors for the U.S. market. To adapt, brokers have expanded their U.S. stock business, resulting in increased media coverage, more research reports on U.S. stocks, and a rise in discussions about U.S. stock performances among investors. Symbols like MSFT and TSLA have become familiar to local investors. Although there is no specific data to support these observations, they clearly reflect a trend in the securities industry over the past two years, which the government should pay attention to.
Over time, the trading volume, activity, and depth of the Hong Kong market have continued to decline. In contrast, the total transaction value in the U.S. increased by 14% from USD 133 trillion in the year before Hong Kong's stamp duty hike (August 2020 to July 2021) to USD 152 trillion in the year after (August 2021 to July 2022). A single U.S. stock, such as Tesla (TSLA), now has a daily trading volume equivalent to two to three times the entire Hong Kong market's daily turnover. Similar disparities are seen with companies like Alibaba, where U.S.-listed BABA shares trade at volumes several times higher than Hong Kong-listed 9988.HK shares.
Considering these factors, raising the stamp duty equates to Hong Kong undermining its own competitiveness. Ironically, it inadvertently benefits competitors by enhancing their market depth and growth, with the U.S. being the most obvious beneficiary. Our IPO market was even surpassed by Indonesia in early 2023. Despite government officials' claims that the stamp duty increase does not affect Hong Kong's market competitiveness, the reality is quite the opposite.
In summary, the increase in stock stamp duty has resulted in: 1) reduced rather than increased tax revenue; 2) impacted investor activity and income, affecting market trading volume and depth; 3) market contraction, creating more "too big to fail" systemic important financial institutions (SIFIs), increasing systemic risk; 4) job insecurity in the industry, accelerating talent loss, affecting government salary tax revenue and increasing social costs; 5) indirectly strengthening foreign competitors; and 6) undermining Hong Kong's competitiveness as an international financial center, affecting its strategic role as China's key international financial hub and slowing the internationalization of the RMB. These unintended consequences highlight the need for the government to closely monitor policy effectiveness and make timely adjustments.
The Hong Kong government's substantial pandemic spending has tightened its finances, so adopting various measures to increase revenue and maintain fiscal stability is understandable. However, the financial industry is a pillar of Hong Kong's economy, with the securities sector being a cornerstone. After years of economic downturn, the industry is weakened. Implementing tax increases in such conditions is akin to treating a critically ill patient; it requires careful monitoring and timely adjustments to avoid harming Hong Kong's competitiveness and strategic positioning.
The most disappointing aspect for the industry is the government's stance on this issue, as officials seem unwilling to acknowledge the impact of the stamp duty increase. Not only did they severely misjudge the effects on tax revenue and competitiveness at the outset, but even with 23 months of post-tax data available, they continue to manipulate figures to deny the facts. The government has misleadingly used indirect indicators like "turnover rate" to claim that the tax increase hasn't affected trading volumes. This rate slightly increased amid the Hang Seng Index's fluctuations, not because of active trading, but due to investors selling off and refraining from re-entering the market. Additionally, the government compared average daily turnover from 1998 to 2001, post-crash, with the volatile 1997 market to argue that tax cuts wouldn't boost trading, a comparison that lacks persuasiveness. Lastly, they blame low trading volumes entirely on external factors, ignoring the impact of transaction costs, which are under government control.
Many industry leaders and professionals have repeatedly expressed that the tax increase is unwise. However, the authorities remain unmoved, which contradicts the current government's stated commitment to listening and pragmatic governance and violates its policy to enhance competitiveness and solidify Hong Kong's status as a global financial center. Those in leadership positions should not cling to outdated policies and must be willing to adapt.
Hong Kong still holds many advantages, but we must not be complacent or self-deceiving. To solve problems, we must first recognize, understand, and accept the facts. The clear data show that the tax increase is ineffective and has far-reaching impacts, already causing significant harm. We urge the authorities to correct this immediately by reducing the tax rate to an internationally competitive level, safeguarding the future of Hong Kong's crucial financial and securities industries. With Hong Kong's strong market foundation, the resilience and efforts of industry elites, and national support, timely adjustments will ensure we can continue to thrive.
Thomas Ip, CFA FRM
Director
Hong Kong Securities and Futures Professionals Association
Sources: Hong Kong Stock Exchange, Securities and Futures Commission, IB, Yahoo, etc.