HK brokers plan to absorb higher share trading levy to ensure retail party continues

HONG KONG, Feb 25 (Reuters) - Hong Kong brokerages could have to absorb the government’s planned increase in stock trading stamp duty or reduce their already wafer-thin commissions, according to brokers, amid concerns the higher levy will reverse a retail buying craze.

Finance Secretary Paul Chan announced on Wednesday in his budget speech that the stamp duty paid on sales and purchases of stock would be increased from 0.1% to 0.13% from Aug. 1 in the global financial hub.

While it will help the city rein in a fiscal deficit set to hit a record in this year, it has triggered worries about a drop in share trading volume in Hong Kong that has soared in the past year mainly due to increased inflows from China.

A drop in the trading volume will be setback for brokerages, especially the mid-sized and small ones, which have benefited from the retail trading frenzy fuelled by abundant liquidity and a slew of new equity offerings.

Retail brokers expect the stamp duty hike to raise the cost of share trading in Hong Kong, which has seen a sharp surge in participation by mom-and-pop investors, who make up about 30% of the market, in recent months.

“The Hong Kong broking market is the most competitive... You could start to see brokerages starting to say we will pay the stamp duty or look at some kind of subsidy to help cover that,” said Wealthy Securities managing director Louis Tse.

While the increase in the levy was modest it would still drive up the cost of trading shares in Hong Kong, Tse said.

On average, commission retail investors pay to brokerages ranges from 0.1% to 0.2% on the value of a transaction depending on each client, according to brokers operating in the Chinese-ruled city.

“We could see brokerages further reduce their commission to offset this stamp duty rise,” Phillip Securities director Louis Wong said, adding he thought the impact on trading volume in Hong Kong would be minimal.

“The tendency of brokers has been to try and lower transaction costs so I think for Hong Kong, as an international financing hub, increasing the financial cost of trading cannot be viewed as positive.”

Gao Zheng, fund manager at Shanghai-based mutual fund house HFT Investment Management Co, said the hike in stamp tax would mainly hit high-frequency trading, but won’t reduce investment opportunities for long-term investors.

The city’s high-frequency traders account for 10% to 20% of the Hong Kong stock exchange’s average daily turnover in the cash equities market, according to an investor presentation by the bourse published in November.

Despite the hike, Hong Kong remains an attract market for mainland investors, with its positioning as the “offshore Nasdaq”, growing number of New Economy stocks, and relatively low valuation compared with Chinese A-shares, Gao said. (Reporting by Scott Murdoch in Hong Kong and Samuel Shen in Shanghai; Editing by Sumeet Chatterjee and Christopher Cushing)