The A Hong Kong stock market is once again a double day of ice and fire.

On Friday, all kinds of high-yield stocks in Hong Kong stocks, especially those on the Hong Kong Stock Connect list, all bucked the trend and surged, leaving A-shares far behind:

$SINOTRANS (00598.HK)$: Hong Kong stocks surged 7.11%, and A shares rose 0.82%;

$CCB (00939.HK)$: Hong Kong stocks surged 6.82%, and A shares fell 0.28%;

$CPIC (02601.HK)$: Hong Kong stocks surged 8.14%, and A shares rose 3.36%;

$PING AN (02318.HK)$: Hong Kong stocks surged 5.77%, and A shares rose 1.39%;

...

The biggest reason for all of this is related to a rumor that Hong Kong Stock Connect may reduce dividend tax.

Yesterday, near the close, Bloomberg News Agency reported that domestic regulators are considering reducing the 20% income tax that mainland shareholders must pay when receiving dividends when investing in Hong Kong stocks through Hong Kong Stock Connect.

Although the rumor has not yet been confirmed, the probability that this rumor is true seems not small, given the regulatory authorities' attitude to a series of reform policies. At least the market is already trading this advantage.

If this policy can actually be implemented, then it will be really important.

01

Hong Kong stocks have always been known as “global valuation depressions”. Like a spell, there is often a big gap between the valuations and dividend rates of the two places, even from A shares to A+H shares listed on Hong Kong stocks.

The difference in dividend ratio between the two is generally at least 20%.

For example, CCB, which surged yesterday, has a dividend rate of 7.482% for Hong Kong stocks and 5.5% for A-shares. The former is 36% higher than the latter.

If it were yesterday, the spread ratio would be even higher.

$CHINA SHENHUA (01088.HK)$Also, the current dividend rate for Hong Kong stocks is 7.97%, and for A-shares it is 6.22%. The former is 28% higher.

Why is this happening?

Apart from the low valuation premium due to the lack of liquidity in the Hong Kong stock market for a long time (the corresponding dividend rate is high), the main reason is the difference in dividend tax rates achieved between the two places.

Domestically, if you hold shares for 1 month and receive dividends, you are taxed at 20%; if you hold shares for 1 month or more, the dividend tax rate is halved to 10%; if you hold shares for more than 1 year, you are exempt from dividend tax.

However, unlike Hong Kong stocks, according to the current relevant tax policy, dividend dividends obtained by mainland investors directly investing in Hong Kong stocks are withheld from personal income tax at a rate of 20%; if they invest in Chinese non-H share listed companies listed in Hong Kong through the Hong Kong Stock Connect channel (including H shares and Chinese red chip shares of the actual management authority in mainland China), an additional 10% income tax will have to be deducted, adding up to 28% of the total tax rate.

Unless mainland shareholders hold H shares continuously for 12 months before being exempted from the 10% corporate income tax withheld, at least 20% of the dividend tax cannot be eliminated.

This has led to a huge difference in dividend rates between the two places.

For example$CHINA MOBILE (00941.HK)$Red chip stocks such as CNOOC (operating in the Mainland, registered and listed in Hong Kong).

The current TTM dividend ratio for China Mobile Hong Kong stocks is 6.26%. The dividend rate for A-shares is 4.2%. The former returns to 4.5% after deducting the 28% dividend tax rate, which is slightly higher than A-shares.

Seemingly, this price difference is small, but this is because Hong Kong stocks rose 14.2% this year, and A-shares only rose less than 2% to pull back.

For some other red chip stocks, the difference in dividend rate after tax deduction will be even more impressive.

This issue has long been questioned and disputed by investors, and has also attracted the attention of the regulatory authorities.

Meanwhile, during this year's two sessions, the Chairman of the Hong Kong Securities Regulatory Commission made a similar proposal. Although the supervisory authorities did not mention dividend tax relief in the five major new measures for Hong Kong stocks, this approach is in line with the goal of helping Hong Kong enhance its status as an international financial center.

So this rumor is still likely.

02

Many people were curious before. Why did the supervisory authorities suddenly introduce five major measures against Hong Kong stocks recently?

In fact, one of the answers is written in these five measures.

Two cores:

First, in order to open the doors of convenience to the Hong Kong stock market to a greater extent, in order to attract greater liquidity (mainly to facilitate the movement of mainland capital to the south).

Second, support more leading enterprises in the mainland industry to go public in Hong Kong.

Beginning at the end of last year, in order to maintain sentiment in the A-share market, A-share IPOs continued to be tightened. Only 30 new shares were listed in Q1 this year, and the financing scale was 23.56 billion yuan, all of which showed a significant drop in the year-on-year period.

However, in the current macroeconomic situation, corporate financing needs cannot be stopped at all, nor can they only rely on traditional offline channels for financing. Now that IPOs are also being tightened, what can we do?

That would support “mainland industry leaders” to go public on the Hong Kong stock market.

However, the liquidity of Hong Kong stocks has always been so poor. As a result, listed companies can evaluate less than a better premium, and the operating space for actual financing is greatly reduced.

Companies don't want to go, and shareholders don't want to come.

However, mainland investors can invest in Hong Kong stocks through the Hong Kong Stock Connect itself, which is heavily restricted by various thresholds, and there is also a higher and less reasonable dividend tax than A-shares.

Everyone was even more reluctant to come over.

This is simply a stalemate.

To break this impasse, we need to find ways to improve the liquidity of Hong Kong stocks.

As a prerequisite, apart from loosening the various thresholds and enriching investment products among the five major measures, the easiest and most effective is to reduce the Hong Kong Stock Connect dividend tax. Let the capital directly see the more attractive dividend rate difference for high-yield Hong Kong stocks after tax cuts.

Currently, there is still a huge difference in dividend rates between many value stocks in the two places, so it can be determined that if the rumor actually comes to fruition, there will be a larger amount of capital going south to buy high-yield Hong Kong stocks in the future.

It will further revitalize the liquidity of Hong Kong stocks and fix the “valuation depression” that Hong Kong stocks have always had. At the same time, it can also help solve the A-share IPO weir lake, solve the problem of corporate financing and development, and already solve the “asset shortage” plight of mainland investors.

The real one: a family full of life.

03

In 2023, M2 increased by 25.84 trillion dollars, a growth rate of 9.7%, of which bank deposits accounted for 25.74 trillion dollars. However, the M1 growth rate is only 1.3%, which indicates that a large amount of money is not actually flowing.

Everyone is desperately trying to save money.

Even so, bank deposit interest rates have dropped over and over again, and all kinds of high-interest deposit and financial management articles have gradually been reduced and discontinued, and a large number of people are still unable to stop saving their money.

According to reports, yesterday morning, a number of banks in Guangdong launched the Guangdong Provincial Government's 5-year refinancing general bonds. The coupon interest rate was 2.2%, which is lower than the fixed deposit listing interest rate of some stock banks and urban commercial banks, but they were still robbed 1 minute after launch, with individual customers accounting for more than 90%.

Some people even started lining up to grab it at 5 a.m., when it didn't light up.

What do the huge deposit sizes and the exaggerated rush to buy low-interest government bonds indicate?

First, there is insufficient confidence; second, there is a shortage of assets.

Currently, in China, there is no shortage of capital for high-quality assets.

It's just that it's hard to find a product that can beat interest rates on long-term treasury bonds and is safe enough.

However, assets with steady performance development and high dividends in the stock market are considered to be one of the few choices.

Therefore, in the past two years, A-share high-yield stocks have become the most favored assets. In the past, they have risen at least two rounds of market prices, respectively, during the mid-term speculation, and the cyclical industry boom has rebounded.

In fact, high-yield stocks in Hong Kong stocks are also a very good asset in terms of dividend rates, but there are too many obstacles.

Now, policy reforms have begun to address this issue, which may include the “dividend tax relief” rumored this time.

In this way, the liquidity dilemma of Hong Kong stocks may be resolved forcefully.

If this dividend tax is actually reduced as rumored, then there will inevitably be a large amount of money to chase down the dividend rate difference, because in the context of more convenient connectivity between the two places, this gap can almost be described as a risk-free arbitrage dividend.

Of course, I think this dividend tax was definitely not directly abolished. Most likely, it would be to abolish the additional 10% dividend tax rate on Hong Kong Stock Connect's red-chip stocks, and then introduce a system similar to A-shares that divides the tax rate based on the length of time they have been held.

Either way, this would be a huge benefit.

So what are the best targets for dividend tax relief?

First, it includes a large number of state-owned enterprises and state-owned enterprises with high dividends in Hong Kong stocks. This is also in line with the logic of “medium special valuation” of A-shares.

Second, it includes industry leaders with strong long-term profitability and dividend capacity, especially outstanding companies in the energy, infrastructure, and consumer sectors listed in A+H.

This trading logic is likely to continue for a short time. Until the rumor is answered, or the actual dividend rates between the two places after excluding the tax difference gradually approach.

04 Epilogue

On Friday, Hong Kong stocks also had another very strong sector — real estate. Not a few stock prices rose by more than 20%. Some housing companies even doubled in the past 10 days.

This was actually expected.

Relieving real estate and real estate debt is one of the key focuses of work since this year.

In particular, after the Politburo meeting's work guidelines at the end of last month, loosening policies were intensively introduced in various regions, and the pace of action was astonishingly fast.

In fact, this is also a weather vane that Hong Kong stocks can usher in a sharp rise.

Because for Hong Kong stocks, the stable real estate sector means that a major crisis in the Chinese economy has been greatly mitigated. This is the key to restoring confidence.

After the real estate crisis abated, the valuation of the Hong Kong stock market became easier as pharmaceutical stocks continued to recover, technology stocks continued to be sought after, and high-yield stocks.

This is also the reason why many international institutions began to re-publish research reports that are optimistic about China, including Chinese real estate, and that public offerings in the first quarter began to allocate Hong Kong stocks in a high-profile manner.

Next, there must be more capital to pursue dividend stocks even more. This will not only gradually increase the valuation of Hong Kong stocks, but will even feed back and stimulate domestic A-share high-yield stocks to continue strengthening.

After all, China's nine regulations on policy supervision itself induce market capital to allocate more of these stable and high-dividend assets. (It is necessary to set a good example in order to attract large amounts of long-term capital from outside the market that have been slow to come in).

Now that the signal has been sent, it depends on whether those long-term institutional funds (including the national team) on the sidelines keep up. (End of full text)

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