Asifma requests notice on Stock Connect

Industry trade body Asifma has asked Hong Kong’s securities regulator to give two weeks' to a month's notice before the launch of the Shanghai-Hong Kong Stock Connect.

The Asia Securities Industry & Financial Markets Association sent a letter setting out its request to the Securities and Futures Commission last Friday, said sources. Asifma declined to comment.

This comes amid uncertainty over issues such as a mooted capital gains tax, which some have argued would be difficult, if not impossible, to apply.

The trading link between the two stock markets was originally expected to go live this month, but that is now looking in doubt.

And even if Asifma members, which include banks and fund managers, are ready for it from a technical point of view, several issues remain unresolved, such as agreeing new terms and conditions with clients, said a source who has seen the letter.

A Hong Kong-based lawyer noted: “I am not surprised such a request has been made, because there is a view that Stock Connect will go live on a Monday – the question is, which Monday? There is a concern that the go-live date could be announced with very little notice – so some people have still not ruled out entirely that it could be October 27.”

Stock Connect had been expected to launch this month, but Charles Li, chief executive of Hong Kong Exchanges and Clearing, said on October 17 that the bourse has no set timetable for the go-live.

Another issue hanging over the launch is increasing industry uncertainty over the issue of capital gains tax (CGT) and whether northbound trades – those made through Hong Kong on the Shanghai bourse – will be subject to CGT in China.

China charges 10% CGT on A-share trades and a dividend tax ranging from 5% to 20%, depending on the holding period, but CGT is not charged on trading of Hong Kong-listed stocks.

HKEx’s Li said in early October that the tax rules would be clarified before Stock Connect is launched, but industry sources have expressed doubt on this front.

“We have always been told that the tax rules will be announced prior to day one, but we are starting to hear that they may not be clarified by then,” said a Hong Kong-based custody executive.

UK bank Standard Chartered had been preparing for Stock Connect on the assumption that there would be an exemption from CGT, at least initially.

“But it has been only very recently, during the course of last week [October 10–16], that some have started saying this may not happen,” said Barnaby Nelson, StanChart’s head of investors and intermediaries for Northeast Asia and Greater China.

He suggested that a tax framework similar to that under China’s qualified foreign institutional investor (QFII) scheme will be implemented if China’s State Authority of Taxation (SAT) decides to charge CGT.

Under QFII, which allows foreign investors to tap into the onshore mainland market, agents such as brokers can withhold 10% in CGT in the event that the SAT decides to charge a levy.

But applying CGT would be cumbersome, and even impossible, one source said. Withholding agents such as brokers lack the infrastructure to determine investors’ net portfolio positions and therefore to calculate the tax, he noted.

Nick Ronalds, managing director of the equity division of Asifma, agreed: “A broker in Hong Kong, no matter how willing and eager to please the exchanges or authorities, may simply be unable to calculate the capital gains tax.”

“They might not have the full picture. A client can move from one broker to another, or can have two brokers or 10­ brokers,” he added.

In the event that China decides to impose the tax, Ronalds has asked mainland authorities to give Hong Kong-based market participants time to comply.

He also warned against introducing the tax retrospectively, pointing to the fiasco in India in 2012 that resulted from the introduction of a retrospective tax after Vodafone's purchase of telecoms group Hutchison Essar in 2007 for $10.9 billion without paying $2.6 billion in CGT.

“That touched off a very considerable reaction among market participants and created huge disruptions in the market," said Ronalds. "It’s not hard to imagine the chaos if brokers were required to start chasing clients from one, two or three years ago for back taxes.”