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The Hong Kong Stock Exchange is poised to lead the world in IPOs. In the past eight months, the city hosted 132 initial offerings to raise a total of $23.8 billion, surpassing the $20.6 billion garnered by the New York Stock Exchange’s (NYSE) 40 sales.
That’s an impressive record. Now for a less impressive metric: Hong Kong trails New York in key category of post-IPO liquidity.
For example, of Hong Kong’s 174 IPOs in 2017, the great majority — 153 stocks — suffered a 70 percent decline in trading volume within three months of being listed. More recently, only four companies maintained or increased volume since their offerings, while 89 had average daily turnover of less than $50,000.
For many companies, the drop in post-IPO liquidity reflects low market capitalisation and little early attention from institutional investors. After all, financial firms account for close to 80% of daily trading volume at the Hong Kong exchange, with the rest coming from retail investors.
There’s another issue, however — stamp duty, the trading tax on stocks.
The Hong Kong government currently imposes 0.20% stamp duty on a round-trip (buy and sell) trade, the highest in world. In New York and Tokyo, there is no stamp duty. In China, only the seller pays 0.10%. In London, the buyer pays 0.50%, but there’s an exemption for financial institutions; the effective rate is therefore less than that of Hong Kong.
While the stamp duty on Hong Kong stocks is high, there may not be much incentive to reduce it, as this tax contributes about 8% of total government revenue.
There are currently 2,309 stocks listed in Hong Kong. The top 10 by market cap account for about 30% of the exchange’s total daily volume. The next 90 account for another 40%, leaving 2,209 stocks jostling for the remaining 30%.
Quant trading may be one of the reasons why large stocks dominate liquidity. Sources suggest that quant strategies now account for 50% of total daily trading volume. As many such funds bet on thin margins, they can only target large-cap, actively traded shares.
A tax cut for smaller stocks would avoid too great a hit for government revenue, while helping broaden the Hong Kong market. A wider pool of investments for traders would jump-start liquidity in smaller stocks.
Reducing stamp duty would also increase trading volume. Look at Australia: The nation halved stamp duty from 0.30 percent to 0.15 percent in 1995, which led to a 50 percent surge in volume. In 2001, the country eliminated the duty entirely, giving trading another lift.
A targeted tax reduction by Hong Kong could be almost neutral for treasury: Total government revenue is projected at about HK$600 billion this year. Assuming stamp duty were cut by 50% and trading volume subsequently rose 50% as a result, the coffers would be just 0.5% (or HK$3 billion) lighter.
The government should look beyond any immediate impact of a cut in duty — the ripple effect would further strengthen Hong Kong’s position as a global financial center and make it the go-to IPO destination for entrepreneurs.
— Bloomberg
Cathy O’Neil is a Bloomberg Opinion columnist. She is a mathematician who has worked as a professor, hedge-fund analyst and data scientist