Northbound trading through the Shanghai-Hong Kong Stock Connect is tipped to hit its daily quota cap when the scheme starts today after Chinese authorities granted a tax waiver late last week for international investors buying A-shares.
Doubts had been raised that the Stock Connect programme would start with a bang, chiefly because of inconsistent tax treatment between the two markets.
International institutions and asset managers had been expected to adopt a wait-and-see approach, largely on the grounds that their trades would have been subject to a 10% capital gains tax (CGT) under mainland Chinese law. JP Morgan Asset Management had already told AsianInvestor that it planned to wait for clarification on the tax issue.
However, on Friday China’s finance ministry declared that Hong Kong and international investors trading northbound would enjoy a CGT waiver “for now”.
Charles Li, chief executive of Hong Kong Exchanges and Clearing, had hinted strongly when the scheme’s launch date was set last week that an announcement to clarify tax uncertainties would be made before launch.
In its statement, the government reasoned that it would have taken a long time for investors to obtain tax exemption, which would have added to execution costs.
However, the ministry did not specify how long the tax holiday might last. It did state that southbound retail traders would be granted relief from CGT for three years.
In the interests of fairness, the finance ministry also waived the tax “for now” for participants of its existing renminbi-denominated qualified foreign institutional investor (RQFII) and qualified foreign institutional investor (QFII) schemes.
While stamp duty will remain in place for all investors, those who qualify to use Stock Connect will be eligible to apply for relief from the 10% dividend tax.
Shanghai-based consultancy Z-Ben Advisors said this was a major step forward, settling fears that tax privileges would vary across the schemes.
It suggested the last barrier to investing for retail players and hedge funds had been removed, and predicted as a result that the Rmb13 billion ($2.1 billion) northbound daily quota cap would be hit on the first day of trading.
Still, it added that further ratification would be needed. “The lack of a fixed length for the tax waiver period may discourage more conservative institutional investors from using the northbound Connect until more details are released,” the agency said.
Its expectation is that southbound sales will be slower and be less likely to hit its respective Rmb10.5 billion daily quota limit.
Originally the Stock Connect scheme had been expected to launch last month, with Chinese premier Li Keqiang having first revealed plans for the scheme at the Boao Forum on April 10, as reported.
However, the Hong Kong stock exchange confirmed late last month that the programme had been delayed amid speculation that the city’s pro-democracy Occupy Central protests had been an influencing factor (which government officials denied), as reported.
The scheme facilitates the direct trading of A-shares by Hong Kong and international investors for the first time, within a daily quota of Rmb13 billion. It also gives access to Hong Kong stocks for mainland Chinese traders, subject to eligibility criteria, within a daily limit of Rmb10.5 billion.