To The Moon

China's economic prospects are clouded by an uneven rebound from the pandemic-induced slowdown, characterized by a sluggish real estate market and historically high unemployment rates among the youth.

This had raised expectations of a potential reduction in mortgage rates, which did not materialize when the central bank only made a slight adjustment to a reference rate for corporate lending earlier this month.

Currently, the authorities have explicitly expressed their primary objective of boosting capital markets and instilling greater investor confidence. This is being pursued through a significant measure: cutting the stamp duty on stock transactions within the mainland by half.

This decision is noteworthy considering that China already boasts the third lowest transaction costs globally, trailing behind only New York and Tokyo, both of which have zero transaction costs.

The reduction in stamp duty, effective as of yesterday, down to 0.05 percent, further reduces the cost of transactions. Following the announcement, benchmark stock indices in Shanghai and Shenzhen experienced a surge and maintained their gains at the market's close. However, experts caution that this enthusiasm might be short-lived.

Investors engage in stock purchases with motivations tied to economic growth, rather than minor reductions in costs. The intention behind these purchases is often the anticipation of value appreciation, coupled with potential dividend payouts resulting from corporate expansion.

The decline in China's stock markets can be attributed to decelerated economic growth and deflationary pressures, leading to decreased stock prices and corporate earnings. Consequently, the outlook for both capital gains and dividend income has been dampened.

Given this backdrop, reducing the already marginal expenses associated with buying or selling stocks is unlikely to significantly enhance the situation. It might, however, prove more appealing in the longer term, once the market regains stability.

Meanwhile, in Hong Kong, where trading costs are second only to London in terms of expensiveness, a task force led by Financial Secretary Paul Chan Mo-po is set to be established to enhance stock market liquidity.

In August 2021, during an economic downturn, the government increased the stock stamp duty by 30 percent in an attempt to secure additional revenue. This move generated an estimated HK$12 billion (US$1.5 billion) in additional annual revenue.

Prior to his October policy address, Chief Executive John Lee Ka-chiu announced the formation of the task force, with the objective of presenting proposals to reinforce the city's competitiveness as a financial hub.

Over the course of 2020 to the end of 2022, Hong Kong's market capitalization contracted by 20 percent from US$6.52 trillion to US$5.52 trillion. Now, with an emphasis on market liquidity, stamp duty becomes an evident target. Nonetheless, Lee indicated that the task force will explore strategies for both immediate and enduring enhancements.

Similar to the mainland, the driving factor behind companies seeking capital and investors placing funds into stocks is the potential for earning returns on their investments.

It is hoped that Chan can assemble a task force that capitalizes on the city's established financial strengths and its inclination toward innovation.