China halves stamp duty on securities transactions to increase investor confidence

From Monday, China will witness a 50% reduction in stamp duty on stock transactions, marking the first such decrease since the 2008 global financial crisis. This decision is part of the government’s recent efforts to stimulate the economy, responding to its uneven recovery. 

The Ministry of Finance and the State Taxation Administration have announced that the stamp duty rate of 0.1% on securities transactions will be halved from August 28 to revitalize the capital market and bolster investor confidence.

China reduces margin requirements for securities purchase

Simultaneously, the China Securities Regulatory Commission (CSRC) introduced additional stimulus measures, including reducing margin requirements for purchasing securities from 100% to 80%, which will come into effect after the market closes on September 8.

Opinions regarding these measures are mixed. Kenny Wen, KGI’s head of investment strategy based in Hong Kong, believes that while these policies might offer short-term relief, investors remain concerned about China’s underlying issues, such as the property crisis and economic slowdown. Nonetheless, other analysts anticipate an immediate positive impact from the stamp duty reduction.

Kenny Tang Sing-hing, chairman of the Hong Kong Institute of Financial Analysts and Professional Commentators, expects the A-share markets to open 2 to 3% higher on Monday due to the stamp duty cut. Additionally, Jiang Yifan, an investment consultant at Guotai Junan Securities, estimates that this reduction could generate annual profits of 120 billion yuan to 130 billion yuan (approximately US$16.6 billion to US$18 billion) for the mainland’s stock markets.

These new initiatives align with the commitment made by China’s top policymakers in July to strengthen the country’s capital markets and enhance investor confidence. A struggling stock market could further complicate the outlook for China’s economy, which is grappling with an uneven post-pandemic recovery, deflationary pressures, high youth unemployment, and a weakening property market.

The CSI 300 Index, representing the 300 largest firms in Shanghai and Shenzhen, has experienced a decline of about 4% this year, following consecutive annual losses. It’s underperforming a broader gauge of Asian equities by approximately six percentage points. Hence, investors have been advocating for a reduction in stamp duty on stock transactions to trigger a relief rally. Notably, during the last cut of the levy from 0.3% to 0.1% on April 24, 2008, amidst the global financial crisis, the CSI 300 Index recorded a one-day gain of 9.3%. Similarly, on September 19 of the same year, when the government eliminated the tax on purchasing stocks, the index surged by the same percentage.

The CSRC also unveiled distinct measures to enhance regulations about stake reductions by major shareholders, directors, and senior executives of listed companies. These measures are intended to refine the relevant liability clauses and intensify the crackdown on illegal shareholding reduction, as stated on the CSRC’s official website.

China working on maintaining sound capital market development 

In a separate announcement, the CSRC also indicated its intention to progressively tighten the pace of initial public offerings (IPOs) to achieve a “dynamic balance” between investment and financing.

Earlier this month, the CSRC committed to enhancing the vibrancy, efficiency, and attractiveness of the market while maintaining the steady and sound development of the capital market. That fosters a positive interaction between the capital market and the broader economy. The regulator also vowed to facilitate financing for Chinese technology companies, promote increased dividend payouts among mainland-listed firms, and guide greater amounts of long-term capital into the market.

On August 10, the Shanghai and Shenzhen exchanges proposed lowering the minimum bid size for shares that investors can purchase. Alongside this, they pledged to optimize regulatory oversight.

Meanwhile, the current month has seen global asset managers divesting from onshore Chinese stocks at an unprecedented rate. That has led to a market value reduction of $900 billion, driven by concerns over a sluggish growth outlook, limited stimulus measures, and unresolved geopolitical tensions between the world’s two largest economies, causing investors to believe that the market downturn is far from over.

In over 13 trading sessions, overseas investors have offloaded 77.9 billion yuan (approximately $10.7 billion) worth of stocks in China’s second-largest equity market through the northbound channel of the cross-border exchange link program with Hong Kong. This ongoing selling trend is the longest since data compilation began in December 2016.