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China Eyes Dividend Tax Cut, Boosts HK Stock Connect Appeal

China considers tax exemption on Hong Kong stocks to boost investment, amid efforts to revitalize the city's financial market.

By Max Weldon

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5/10, 01:11 EDT
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Key Takeaway

  • China considers exempting individual investors from the 20% dividend tax on Hong Kong stocks, aiming to equalize investment conditions.
  • CSRC plans to expand Stock Connect in 2023, enhancing Hong Kong's market attractiveness amid declining IPOs and trading volumes.
  • HKEX faces a downturn with a 17% drop in southbound trading volume and a 13% decrease in Q1 profit, highlighting the need for revitalization efforts.

Tax Exemption Proposal

China is currently considering a proposal that would exempt individual investors from the 20% dividend tax on Hong Kong stocks purchased through the Stock Connect program. This move is aimed at preventing double taxation and creating fairer investment conditions between Hong Kong and mainland China. The China Securities Regulatory Commission (CSRC) and the State Taxation Administration are reviewing the proposal, which was submitted by Hong Kong. Hong Kong does not impose a dividend tax, highlighting the disparity with mainland China's policy. While the exemption has garnered significant interest, a final decision has not been made, and the timeline for implementation remains uncertain.

Market Revival Efforts

In an effort to revitalize Hong Kong's financial market, which has seen a downturn in initial public offerings (IPOs) and trading volumes, the CSRC is planning to expand the scope of the Stock Connect. Julia Leung, Chief Executive of Hong Kong's Securities and Futures Commission (SFC), indicated that these changes are expected to be implemented within the year. These measures are part of a broader strategy to enhance the market's attractiveness and liquidity, demonstrating a commitment to improving Hong Kong's financial landscape amidst challenges.

Trading Activity and Financial Performance

Recent data has shown a decline in trading activity through the southbound link of the Stock Connect, with an average daily trading volume of HK$31 billion in the first quarter, marking a 17% decrease from the previous year. This downturn has also affected the financial performance of the Hong Kong Exchanges and Clearing Limited (HKEX), which reported a 13% year-on-year drop in first-quarter profit. Furthermore, HKEX's share price has significantly declined, currently standing 53% lower than its early 2021 levels. These figures underscore the urgency of implementing measures to stimulate recovery and growth in Hong Kong's financial market.