HK budget hands sweetener to ETF providers

Investment industry participants and practitioners welcome yesterday’s proposal by the Hong Kong government to exempt exchange-traded funds from stamp duty as part of its 2014-15 budget.

This move is an extension of a the introduction in 2010 of a waiver of stamp duty for ETFs whose AUM was more than 40% comprised of Hong Kong stocks.

The government now plans to waive the 0.1% stamp duty per ETF trade done for both buyer and seller for all such products. This will benefit the remaining 28 of the 128 ETFs listed in Hong Kong not exempt under the previous waiver.

The number of ETFs listed in Hong Kong has nearly doubled to 128 by February 14 from 69 at the end of 2010, says Deutsche Bank. Daily average turnover has risen to $3.7 billion from $2.4 billion between 2010 and 2013, according to the Hong Kong government.

The move will remove a drag on turnover and liquidity, says Rolfe Hayden, partner at law firm Simmons & Simmons, which has by far the biggest market share of ETF legal work in Hong Kong.

It is hoped it will boost institutional demand for the products in particular, given that they trade larger volumes and more frequently than retail investors.

Marco Montanari, Asia-Pacific head of passive asset management at Deutsche Asset & Wealth Management in Hong Kong, says: “We are of course supportive of measures that help ETF market growth.” In any case, he says all the firm’s Hong Kong-listed ETFs were already exempt from stamp duty under the 2010 waiver.

Others don't see the change as very significant. Anne-Marie Godfrey, Hong Kong-based partner at law firm Bingham, says: “The stamp duty cost was not necessarily a huge disincentive to people setting up ETFs in Hong Kong, but it all helps [to make the city an attractive place to list].”

While it is still at proposal stage, it should not take long to implement, given that it is an easy change to make, says Godfrey.

Hong Kong’s ETF AUM stood at $33.6 billion as of February 14, making it the second biggest market in Asia after Japan’s $77.6 billion, and just ahead of China’s $24.6 billion, according to Deutsche Bank.

The concession comes at a time when the government is looking to make other changes to tax treatment of the financial markets with a view to helping the city become a funds hub in the region. One such plan is the removal of the profits tax for the private equity fund sector.

The abolition of stamp duty follows a similar move by the UK government late last year.