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Investors Benefit from Mainland-Hong Kong Stock Trade Links

Posted by: Zhorea Garcia
Category: Economy & Trade, Tax and Regulations
Investors Benefit from Mainland-Hong Kong Stock Links

China investors will continue to experience tax breaks for gains derived from the mainland-Hong Kong stock trade links. According to China’s Ministry of Finance (MOF), the tax exemptions started from December 5, 2019, and investors will be able to enjoy them until December 31, 2022. The same tax exemptions will also apply to income taxes in the same period.

Take a look at our previous article China to Offer a Bigger Tax Break for Small Firms

In the past few years, China has established the Shanghai– and Shenzhen– Hong Kong stock connect schemes to support the MRF scheme. The ministry will grant tax breaks from profits made under the MRF scheme. Find out what MRF is and how the stock linkages benefit investors.

What is MRF?

In 2015, the China Securities Regulatory Commission (CSRC) and the Securities and Futures Commission (SFC) announced the implementation of the Mainland-Hong Kong Mutual Recognition Funds (MRF). The Hong Kong Monetary Authority (HKMA) developed the MRF scheme to act as a financial infrastructure for cross-border investments. Through the MRF, Hong Kong can gain access to international investors while the latter can increase exposure to Asian markets.

CSRC has so far approved a total of 1,500 investment funds in the mainland while SFC has approved about 450 in Hong Kong. MRF signifies a mutual opening of the capital market between Mainland China and Hong Kong. It aims to deepen and broaden the scope of the asset management industries. Thus, it is expected to enhance the competitiveness of fund management firms.

Shanghai– and Shenzhen– Hong Kong Stock Connects

China launched the Shanghai-Hong Kong Stock Connect in 2014, following the implementation of MRF. Three years later, it garnered a total of RMB 3.35 trillion (USD 509 billion) shares traded by international investors. The Hong Kong Exchange and Clearing (HKEX) reported HSBC and liquor maker Kweichow Moutai as the winners in mainland-Hong Kong stock connect trading with the most heavily traded stocks.

On the other hand, the Shenzhen-Hong Kong Stock Connect established in 2016 gained RMB 705 billion worth of overseas traded stocks within that year.

Also, check out London Shanghai Stock Connect – What to Expect

These two connect schemes provide the venue in which international investors can trade eligible stocks in Shanghai or Shenzhen via any licensed broker provided by HKEX. At the same time, mainland investors have the means to trade through HK-listed stocks.

HK-listed stocks

The Shanghai– and Shenzhen– Hong Kong Stock connects are called Northbound Trading. On the other hand, Southbound Trading refers to Hong Kong. In these connect schemes, Hong Kong and overseas investors can trade eligible stock exchange securities (SES) with mainland investors.

The stock- and bond- trading links with Hong Kong have paved the way for a much easier buy and sell of assets. Therefore, foreign investors can continue to enjoy these trade and investment initiatives.

Tax breaks for investors

On August 30, 2018, the State Council announced a three-year exemption from corporate income tax (CIT), withholding tax (WHT) and value-added tax (VAT). This mainly benefited overseas institutional investors. The MOF and the State Taxation Administration (STA) issued Circular 108 (财税(2018) 108号 on November 22 in the same year, following the State announcement. Through this circular, foreign investors can get access to various investment channels through China’s capital markets. These include:

  • China Inter-Bank Market (“CIBM”)
  • Stock exchanges in Shanghai and Shenzhen through the Qualified Foreign Institutional Investors (“QFII”) and RMB Qualified Foreign Institutional Investors (“RQFII”)
  • CIBM for qualified financial institutions via the Mainland-Hong Kong Bond Connect program

The WHT (10%) and VAT (6%) exemptions were applied to overseas investors from November 7, 2018, and will continue until November 6, 2021. This year, mainland retail investors are expected to get tax relief through the MRF scheme. Hence, they will also benefit from the Shanghai– and Shenzhen– Hong Kong connects. The linkages enable mainland and Hong Kong investors to directly trade qualified funds in each other’s markets.

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Author: Zhorea Garcia

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