HONG KONG (Reuters) – Hong Kong raised stamp duty on stock trading on Wednesday for the first time in nearly three decades as it tries to fill a record budget deficit caused by the epidemic, sending the domestic stock market down.
The business-friendly financial center, which boasts low taxes and no capital gains tax, has been hit for two years by the long-running political turmoil and then the coronavirus, putting a lot of pressure on government coffers.
In an effort to shore up finances, Chief Financial Officer Paul Chan said he would raise the tax on stock transactions to 0.13% from 0.1%, the first increase since 1993.
This news sent the Hang Seng Index down more than 3%, while the exchange operator HKEx collapsed more than 11% at one point.
“While we are disappointed by the government’s decision to increase stamp duty on equity transactions, we realize that such a tax is an important source of government revenue,” a Hong Kong spokesman said.
The economy reached a record 6.1% in 2020, but Hong Kong was already struggling at the start of the year, having experienced months of sometimes violent pro-democracy protests that caused much of the city to shutdown for prolonged periods.
The impact of the epidemic was compounded by geopolitical tensions as Beijing sought to stamp out dissent in the city by introducing a controversial security law that has raised questions about its future as a global financial center.
The government entered the pandemic with one of the healthiest fiscal reserves in the world, but fell into a record deficit of 258 billion Hong Kong dollars last year as officials boasted to support the economy.
However, the stock market was one of the best performers this year, as global stocks rose amid optimism that the introduction of vaccines, lower infection rates and easing of lockdowns will lead to a strong economic recovery around the world.
Chan made an optimistic note of the economy this year, expecting it to expand between 3.5% and 5.5%.
The city plans to start its vaccination program on Friday and hopes are high that the city can find its way out of the cumbersome social distancing measures that have held back businesses for most of the past year.
Chan announced spending measures of more than 15.5 billion HK dollars this year to ease economic hardship for city residents – nearly half of what was spent last year.
An additional $ 1 billion has been allocated to help secure “national security.”