China’s Shanghai Composite Index and Hong Kong’s Hang Seng Index saw significant rises after reports that the government would take various policy measures.
Shanghai Composite Index
The Shanghai Composite saw an increase of approximately 0.2 percent to 3,162 points in the first few hours of trading. Furthermore, the rise also represented an overall increase of 20 percent from the index’s lowest point in mid-January, after the index collapsed.
The rise came amid reports that the Chinese government may waive income tax on dividends for Chinese citizens who invest in Hong Kong stocks via Stock Connect. Hong Kong’s government submitted a proposal to waive the 20 percent tax on dividends bought via the Stock Connect link that connects Hong Kong to Shanghai and Shenzhen. Several analysts say that the increases brought on by the news indicate that the market has entered or is on track to enter a ‘technical bull market.’
Hong Kong’s Hang Seng Index
The Hang Seng Index saw a significant increase during trading hours, with the stock market reaching 19,002 points. However, the market declined between 39- and 83-points during afternoon trading hours with the market closing up 2.3 percent to 18,963 points, the highest level since August 2023. The rise is due to the income tax waiver proposal, and several second-tier cities, such as Hangzhou, Hefei, and Xi’an, waived resident property purchasing curbs and will hand out subsidies for home purchases.
Analysis
The increases seen in both the Shanghai and Hong Kong indexes occurred due to the Chinese government potentially enacting policies to solve some of the issues affecting both the Chinese and Hong Kong economies. The news that the Chinese government is contemplating eliminating taxes on dividends from Hong Kong stocks will serve several purposes. The waiver would allow for the creation of a more equal investment environment for Chinese and Hong Kong investors, which would lead to more investment opportunities in both markets. If the Chinese government approves the proposal, Chinese individuals who gain dividends from investing in the Hong Kong stock market would avoid double taxation. Furthermore, the waiver would also enable the alignment of fairer investment arrangements for Chinese and Hong Kong investors. This aspect is especially important since Hong Kong does not have taxes on dividends gained through investment.
China also hopes to incentivize Chinese people to increase their investment in Hong Kong by waiving dividend taxes. Furthermore, the government believes that the incentive will also lead to increased investor confidence in the Chinese stock market. For example, investors could invest more in the Shanghai Composite Index since it will not be double-taxed by investing in the Hong Kong stock market. The proposal is also the latest in a series of measures that the Hong Kong government has proposed since the start of 2024 to increase investor confidence. The Hong Kong government hopes that the increase in investor confidence will continue the stock market’s strong performance since its record low in mid-January.
The Chinese second-tier cities’ announcement that they will eliminate curbs to buy property and hand out subsidiaries for home purchases also serves several purposes for both China and Hong Kong. The cities that enacted the proposals hope to create incentives for Chinese individuals to buy homes that are available on the market. The subsidiaries will also assist in reducing the large number of unsold houses that are on the market in those cities. Furthermore, the directives would also provide some revenue to the real estate companies and local governments, which would decrease the debt they hold. The subsidiaries would also allow the local Chinese governments to increase their revenue streams since they would receive taxes from the house purchases. The proposals would also increase investor confidence in both the Chinese and Hong Kong stock markets, specifically their real estate sectors. There is evidence that the confidence is translating into gains in the Hang Seng Index, such as the real estate sector recording a 3.79 percent rise on May 10th. China would also benefit from the increased confidence in the overall economy by allowing it to spread to other parts of the economy.
While both the Shanghai Composite and Hang Seng Indexes saw significant increases during the morning trading hours, both closed lower than the peaks witnessed throughout the day. The decrease in both indexes is due to the news that the Biden Administration is close to deciding whether to enact tariffs on Chinese products. Investors became cautious when news emerged that the Biden Administration would potentially place tariffs on products in several Chinese industries as early as next week. The potential for the administration to place tariffs on Chinese products is high due to the upcoming U.S. presidential elections.
Biden needs to differentiate his policy from Republican candidate Donald Trump’s, who proposed enacting tariffs on almost all Chinese products. However, Biden would likely choose a more measured approach since it would allow him to show voters that while he is acting to roll back China’s aggressive market dumping actions, he will not be as extreme as Trump. Furthermore, the news about the potential for tariffs also caused the market to close flat, i.e., at the same level it started the trading day, contradicting the notion that the index is on track to enter a ‘technical bull market.’