On 24 October 2023, the Chief Executive of the Hong Kong Special Administrative Region (HKSAR), John Lee, delivered the second "Chief Executive's 2023 Policy Address" (hereinafter referred to as the "2023 Policy Address") during his tenure. With the theme of "Striving for Economic Development, Benefiting People's Livelihood and Happiness", the policy focus has further transitioned from "short-term relief" during the epidemic to medium- and long-term development.
The report puts forward a series of measures to "enhance development momentum, solve people's livelihood difficulties, and maintain harmony and stability"; It is worth noting that this report focuses on responding to market concerns on key issues such as improving stock market liquidity and optimizing tax on home purchases. We will sort out and analyze the policy context and highlights of this report.
On 24 October 2023, the Chief Executive of the Hong Kong Special Administrative Region (HKSAR), John Lee, delivered the second "Chief Executive's 2023 Policy Address" (hereinafter referred to as the "2023 Policy Address") during his tenure. The policy priorities of this report further focus on consolidating the foundation for recovery, enhancing Hong Kong's competitiveness, identifying growth drivers for emerging industries and improving people's livelihood in an all-round way, and responds to market concerns on key issues such as enhancing stock market liquidity and optimising tax payments on home purchases. We will sort out and analyze the policy context and highlights of this report.
With the theme of "Striving for Economic Development, Benefiting People's Livelihood and Happiness", the 2023 Policy Address places more emphasis on economic growth and development than the 2022 Policy Address of "Seeking Happiness for the People and Development for Hong Kong", and further transitions the policy focus from "short-term relief" during the epidemic to medium- and long-term development.
In the first half of 2023, Hong Kong's GDP grew by 2.2% year-on-year, reversing the negative growth in 2022, with service exports and consumption becoming the main driving forces for economic recovery. Against the backdrop of pressure on external demand and tightening financial conditions, Hong Kong's imports and exports continued to decline, the capital market fluctuated widely, and rising interest rates suppressed property prices and property transaction sentiment, and the economic recovery still needs to be strengthened.
The report proposes to revitalize the tourism industry, support local consumption, consolidate the core drivers of economic recovery, and continue to help SMEs return to normal after the epidemic from the perspectives of financing and transformation support. Among the relevant measures, the reduction of the stamp duty rate for housing purchases has become the highlight of the policy address, and the policy of "grabbing people and enterprises" has also been strengthened compared with before. At the same time, the policy further focuses on sustainable development and improving people's livelihood, and proposes a number of bright measures in creating a livable environment, especially in "solving the problem of subdivided units (housing within a house)", encouraging childbirth (providing a family subsidy of HK$20,000 for newborns), elderly care and youth education.
In order to curb the behavior of "property speculation" and the rapid rise of property prices, the Hong Kong SAR government has successively launched the triple property tax "spicy measures" since November 2010, but due to the impact of housing supply exceeding demand, the residential property price index has still increased by about 1.4 times in the following ten years. In the past two years, against the backdrop of repeated epidemics and interest rate hikes by the Federal Reserve, the property price index fell by 15.6% in 2022, the largest decline in 24 years. At the beginning of 2023, property prices rebounded in stages driven by the resumption of customs clearance, but high interest rates still suppressed real estate transaction sentiment, and as of September, residential property prices have erased the increase in last year and fell by 0.78% this year.
On the demand side, the 2023 Policy Address lowered the stamp duty on residential property purchases for the first time in more than a decade, mainly including supporting real estate transactions for eligible foreign talents during the period of maintaining high interest rates in the periphery, and at the same time effectively lowering the threshold for foreign talents to buy property in Hong Kong, so as to enhance Hong Kong's attractiveness to talents in the medium to long term.
On the supply side, according to the Long Term Housing Strategy, the HKSAR Government expects the demand for private housing to be 132,000 units in the next 10 years, and the Government will reserve land for the construction of about 80,000 private housing units in the next five years. While stabilising the supply of private housing, in line with the latest public housing policies, we will further build a housing ladder connecting the public and private housing tracks, so as to facilitate residents to gradually transition from applying for public housing to purchasing private housing.
The 2023 Policy Address sums up the achievements of the measures to attract investment and talents in the past year: as at the end of September 2023, a total of 160,000 applications had been received for various talent admission schemes, of which more than 100,000 had been approved and about 60,000 had arrived in Hong Kong; The Office of Attracting Strategic Enterprises has approached more than 200 key enterprises, 30 of which are planning to set up or expand their business in Hong Kong, involving about HK$30 billion in new investment and is expected to provide about 10,000 jobs.
In this report, measures to attract talents and enterprises have been further strengthened. In terms of talent grabbing, the first is to expand the "Top Talent Pass Scheme", increasing the list of eligible universities by 8 top Mainland and overseas institutions to 184. The second is the introduction of the Capital Investment Entrant Scheme, under which eligible investors who invest HK$30 million or more in assets (excluding real estate) such as stocks, funds and bonds in Hong Kong can apply to enter Hong Kong. The third is to propose the "Residence Scheme for Vocational and Professional Education Graduates" in response to the talent gap in the technology industry, and the visa relaxation plan for overseas talents to liberalize the policies for talents from Vietnam, Laos, Nepal and other ASEAN and "Belt and Road" related countries to come to Hong Kong. In terms of attracting enterprises, the new policy mainly includes attracting domestic and foreign companies to set up headquarters/branches in Hong Kong, introducing a mechanism for re-domiciliation of companies, and proposing that foreign personnel of Hong Kong-registered companies in Hong Kong can negotiate business in the Mainland through "one visa and multiple lines". At the same time, it clarifies the policy assessment indicators, proposing to introduce the Office of Strategic Enterprises to contact no less than 300 key enterprises in 2024, attract at least 1,130 enterprises to open or expand their business in Hong Kong from 2023 to 2025, bring in at least HK$77 billion in direct investment and create at least 15,250 job opportunities, etc., which is expected to promote the efficient implementation of the introduction measures.
Against the backdrop of continuous interest rate hikes in the external market and the slower pace of economic recovery in the mainland and Hong Kong, Hong Kong stocks have fluctuated downward since February this year and are still down 15% this year, with the average daily turnover of the main board falling from nearly HK$140 billion in January to HK$90 billion in September, a new low since 2020. The poor market sentiment also dampened the willingness to issue new shares, and the scale of IPO financing in Hong Kong stocks fell by about 69% year-on-year in the first three quarters.
The 2023 Policy Address emphasises that the vigorous development of the stock market is crucial to consolidating Hong Kong's status as an international financial centre and international competitiveness. On 29 August, the HKSAR Government set up a task force on enhancing stock market liquidity to conduct a comprehensive review of the factors affecting stock market liquidity, and proposed a number of targeted new measures to enhance the competitiveness of the stock market on the basis of the measures in the previous Policy Address. Among them, measures such as reducing the stamp duty rate on stock transactions from 0.13% to 0.1% and studying the narrowing of the minimum bid-ask spread for stock transactions are expected to further reduce the cost of stock market trading friction. On the basis of the implementation of the previous policies, it is proposed to continue to review and optimize the main board listing rules, promote the reform of the GEM sector (GEM), and attract high-quality enterprises from the Middle East to list in Hong Kong, which is also expected to attract incremental funds for the Hong Kong stock market and consolidate the competitiveness of the Hong Kong stock market in the medium to long term.
2.1.1 What is the impact of the stamp duty reduction on stock transactions?
Hong Kong stocks have experienced four stamp duty adjustments in their history. From 1998 to 2001, the tax rate was gradually reduced from 0.15% to 0.1%, and then maintained for nearly 20 years. The 2021-22 Budget of the HKSAR Government raised the stamp duty rate on stock transactions from 0.1% to 0.13% for both buyers and sellers, which came into effect on 1 August 2021.
According to past experience, the reduction of stamp duty has a limited direct effect on the market, and is conducive to the increase of transactions in the medium and long term. From the perspective of stock index performance, the Hang Seng Index rose within 1-2 trading days after the relevant policy was announced in 1998 and the policy came into effect in 2000, and then fell back quickly. Driven by the overall market sentiment, the Hang Seng Index still recorded a short-term rise after the SAR government raised the stamp duty on transactions in 2021. In terms of trading volume, although stamp duty was reduced three times between 1999 and 2001, the average daily turnover of the Main Board still dropped from HK$15.4 billion in 1997 to HK$6.4 billion in 2002. It can be seen that the overall rebound of the market is still driven by factors such as improved medium- and long-term fundamentals and relatively loose capital.
In light of the situation in the past two years, the HKSAR Government raised the stamp duty rate for the first time in 2021 because, on the one hand, as Hong Kong's economy is still plagued by the epidemic and the government's fiscal pressure is increasing, it is necessary to increase revenue to alleviate people's hardship; On the other hand, during the epidemic, the implementation of quantitative easing monetary policy in the external market, the return of Chinese concept stocks to Hong Kong stocks, and the increase in the listing of Hong Kong stocks, the capital of Hong Kong stocks remained active. In 2020, the average daily turnover of Hong Kong stocks increased by 50% compared with 2019 to nearly HK$130 billion, and further increased to a record high of more than HK$160 billion in 2021.
Since 2022, as the local economy has stabilized, the pressure on the HKSAR Government's fiscal deficit has decreased. However, the external monetary policy has turned tighter, the capital market sentiment has deteriorated, and the income of stock market participants has declined and their sensitivity to transaction costs has increased. According to data from the Hong Kong Securities and Futures Commission, the net profit of SEHK participants fell by 80% from HK$27.4 billion in 2021 to HK$5.6 billion in 2022, during which the number of closed brokerages increased and the number of licensed representatives also showed a downward trend. The reduction of stamp duty at the current time is expected to send a positive signal to the market and boost the trading sentiment of Hong Kong stocks in the stage of stabilization and recovery. In the first three quarters of this year, the average daily turnover of the main board of Hong Kong stocks was about HK$110 billion, and based on a rough calculation, the reduction in stamp duty rate of 0.03% is expected to reduce the daily transaction cost by HK$33 million. In the short term, Southbound investors in Southbound Stock Connect, which were more active during the year, are expected to benefit relatively. In the medium to long term, the reduction in stamp duty rates is expected to attract more short-term buyers, long-short strategy funds and high-frequency traders who are relatively sensitive to transaction costs.
At the same time, compared with other major markets, the current stamp duty cost of Hong Kong stocks is still high, and the market still expects further tax rate reductions. At the fiscal level, the HKSAR Government previously estimated that the reduction of the stamp duty rate to 0.1% will reduce the government's fiscal revenue by HK$12.3 billion, equivalent to 2% of the government revenue in the 2022-23 financial year, based on the actual revenue of the 2022-23 stock stamp duty, and the impact on fiscal revenue is expected to be relatively small.
2.1.2 GEM reform is expected to reshape the ecology of the high-quality small-cap market
Prior to the release of the 2023 Policy Address, HKEX launched a public consultation on GEM listing reform on 26 September, with proposals including the implementation of a new "simplified transfer mechanism", easier transition of eligible GEM issuers to the Main Board, new eligibility tests for high-growth companies, and the abolition of quarterly reporting requirements, which are expected to come into effect in the first quarter of 2024.
In the past, some participants in the GEM market used the transfer mechanism to carry out regulatory arbitrage, which once led to the proliferation of "shell stocks"; In order to improve the quality of the market, the Hong Kong Stock Exchange cancelled the "simplified transfer mechanism" of GEM in 2018, which effectively suppressed the activities of "shell building" and ramp-and-dump bulk cargo, but since then, the listing and trading volume of the GEM sector have continued to shrink. Since January 2021, there have been no new listings in the GEM sector. At the same time, although the number and market value of the small-cap sector have continued to grow over the years, the share of the trading volume has shrunk as a whole, and the liquidity of the secondary market of Hong Kong stocks has gradually concentrated in large-cap stocks. The reformed GEM mechanism is expected to further support the financing of small and medium-sized enterprises, and at the same time, it is expected to drive more financial institutions to participate in the sponsorship and underwriting business of small stock listings, check the quality of listed companies, and promote the demand for small stock research, so as to improve the liquidity and valuation level of related sectors.
In the last Policy Address, the HKSAR Government first mentioned "comprehensively enhancing the competitiveness of financial services", and the 2023 Policy Address continues to emphasise "consolidating and leveraging the advantages of financial services", further connecting domestic and foreign markets and investors, building a more innovative and diversified financial market, and expanding mutual access with the Mainland's financial markets.
2.2.1 Strengthen offshore RMB business
As of August this year, the amount of RMB deposits in the Hong Kong market exceeded 960 billion yuan, a cumulative increase of 15% during the year, and Hong Kong is the world's largest offshore RMB settlement center, with 75% of the world's offshore RMB settlement business conducted in Hong Kong. The 2023 Policy Address proposes to strengthen Hong Kong's status as an offshore renminbi centre and diversify offshore renminbi investment varieties, including fully promoting the inclusion of the renminbi counter in the Hong Kong Stock Connect and promoting the issuance of treasury bond futures in Hong Kong; At the same time, we will study supporting the use of Mainland renminbi bonds as eligible collateral in Hong Kong, so as to facilitate international investors to conduct renminbi-related liquidity management in Hong Kong and enhance Hong Kong's role as an international risk management centre.
In 2023, the HKSAR Government completed legislation to exempt stamp duty on certain transactions of market makers in the "HKD-RMB Dual Counter" securities market, and officially launched the "Dual Counter Model" in June, fulfilling the target set in the previous Policy Address. As of the end of September, 24 stocks have been opened for dual-currency counter trading, including Tencent, Meituan, BYD, Bank of China Hong Kong and other large stocks. In the future, the further inclusion of the RMB counter in the Stock Connect is expected to help Mainland investors hedge the exchange risk of HKD-denominated and RMB-settled exchanges, and enhance the convenience of southbound trading in the stock market. In addition, according to Bond Connect, more than 40% of the current Northbound Bond Connect investments are concentrated in bonds with a maturity of five years or more, and there is a relative lack of effective ways to hedge related interest rate risks, and there is currently a greater demand for treasury bond futures. Subsequently, the further launch of offshore government bond futures is expected to provide an important supporting package for the Northbound Bond Connect and attract more medium- and long-term institutional investors to participate in the mainland bond market.
2.2.2 Deepen financial co-operation in the Greater Bay Area
The 2023 Policy Address further proposes to deepen financial co-operation in the Greater Bay Area. First, we will continue to promote the expansion of Stock Connect, including further enhancing Bond Connect and increasing the product types and trading mechanisms of Stock Connect. Second, we will continue to make good use of the financial reform and innovation measures of the Qianhai Co-operation Zone, support financial institutions to conduct cross-border business, and expand the business scope of Hong Kong financial institutions in Qianhai, in particular, to promote Hong Kong limited partnership funds to obtain the qualification of former foreign-invested equity investment management enterprises (QFLPs) and participate in private equity investment in the Mainland. The third is to promote the interconnection of the insurance market, and promote the establishment of insurance after-sales service centers in Nansha, Qianhai and other places to provide support for residents of the Greater Bay Area who hold Hong Kong insurance policies. In addition, Hong Kong and Shenzhen will jointly set up the Shenzhen-Hong Kong Financial Co-operation Committee in the first half of 2024, aiming to strengthen the mutual access of financial markets, fintech and green finance co-operation, and financial talent exchanges.
In the past year, the mutual access between the financial markets of the Mainland and Hong Kong has made a number of progresses: following the inclusion of ETFs in Stock Connect in July 2022, Southbound further included foreign companies listed in Hong Kong in March 2023, and enhanced the trading calendar and increased the number of trading days in April. In May 2023, the Mainland-Hong Kong Interest Rate Swap Market Connect (Northbound Swap Connect) was launched to facilitate foreign investors to access the more liquid onshore interest rate swap market and manage short-term bond interest rate risk more effectively. In August 2023, the Mainland and Hong Kong reached a consensus on the inclusion of block trades in Stock Connect, and block trades through Northbound and non-automatic matching trades through Southbound Stock Connect will be opened simultaneously. In the future, it is expected to enrich the scope of Stock Connect products and introduce incremental funds to the capital markets of the two places.
From the perspective of industrial transformation, the 2023 Policy Address will continue to focus on the development of Hong Kong's "eight centres" and put forward a series of measures to explore the momentum of diversified transformation of the local economy, based on the implementation of the policies in the previous report. Compared with the past, the policy of this report further emphasizes the need to consolidate Hong Kong's unique advantages as an international city, "maintain a high degree of internationalization", strengthen the integration and regional cooperation of the Greater Bay Area, and give prominence to the development of markets such as ASEAN and the Middle East.
At the local level, the first is to build an international I&T hub, relying on the development of Hong Kong's Northern Metropolis, and continue to promote the implementation of the measures of the Hong Kong Innovation and Technology Development Blueprint issued in December 2022. The second is to enhance the influence of cultural and creative industries, and strengthen the overall planning and funding of related industry activities. The third is to promote the development of the new energy transport industry, including promoting the use of electric private cars and related tax concession arrangements, and formulating the Hong Kong Hydrogen Energy Development Strategy.
At the GBA level, on the one hand, the emphasis on co-operation between the two places is emphasized, and the Policy Address proposes that Hong Kong is actively seeking to enrich the content of CEPA, and strive to further open up the Mainland to Hong Kong in the GBA and beyond the whole territory in areas where Hong Kong has special advantages (such as financial services), so that Hong Kong companies can expand into the domestic market of the whole country. On the other hand, it proposes to promote "digital cross-border flows", and studies on digital infrastructure, cross-border data flows, digital transformation of enterprises and human resources support, and will put forward proposals in early 2024. Previously, the Mainland and Hong Kong signed a Memorandum of Understanding (MoU) in June 2023 to facilitate the secure cross-border flow of mainland data within the Greater Bay Area, and Hong Kong is discussing with Guangdong Province the compliance arrangements to simplify the flow of personal data from the Mainland to Hong Kong, which is expected to support the interconnection of personal financial services and medical services for residents in the Greater Bay Area.
At the regional level, the focus includes exploring business opportunities with Mainland enterprises, setting up more commercial and trade offices along the Belt and Road, and strengthening trade promotion in emerging countries; At the same time, Hong Kong will strive to join the RCEP at an early date, sign an investment agreement with Turkey, negotiate a free trade agreement with Peru, and negotiate an investment agreement with Bahrain, Bangladesh and Saudi Arabia respectively, so as to further develop an international trade center, a regional intellectual property trading center, an international shipping center and an international aviation hub.
From the perspective of financial business, the 2023 Policy Address is expected to further attract private capital and bring incremental business opportunities to financial institutions, especially Chinese banks in Hong Kong, by further coordinating the financing of large-scale local projects and industrial investment in the Greater Bay Area, promoting the development of the "headquarters economy" and helping mainland enterprises to "go global".
At the local level, the 2023 Policy Address announced the establishment of a "Large-scale Development Projects Financing Committee" led by the Financial Secretary and a "Large-scale Development Project Financing Office" to promote the construction of large-scale projects such as the Northern Metropolis and the Kau Yi Chau artificial islands. At the GBA level, the report points to the Hong Kong Investment Corporation Limited