China is considering a proposal to exempt individual investors from paying dividend taxes on Hong Kong stocks bought via Stock Connect, according to people with knowledge of the matter.

Regulators including the China Securities Regulatory Commission (CRSC) and the State Taxation Administration are reviewing a plan submitted by Hong Kong to waive the 20% tax on dividends from Hong Kong stocks bought via the link that connects to Shanghai and Shenzhen, the people said, asking not to be named discussing private information.  

The proposal aims to avoid double taxation and align fairer arrangements for investors both in Hong Kong and China, the people added. Hong Kong has no tax on dividends. 

A final decision is still pending and there’s no definite time line to implement, the people said. 

The proposal comes as Hong Kong strives to revive its market after a prolonged downturn in initial public offerings and trading volumes. Activity has picked up recently after the CSRC last month issued a series of supportive measures, including expanding the scope of the Stock Connect.

A Hong Kong stock exchange spokesperson and the city’s Securities and Futures Commission (SFC) declined to comment. The CSRC wasn’t immediately available to comment. 

The Hang Seng China Enterprises Index rose 1.6% in Hong Kong on Thursday, snapping a two-day decline. 

SFC chief executive Julia Leung said this week that Hong Kong is looking to implement the changes within this year. 

The move would be “positive” for the Hong Kong market and should help keep southbound flows elevated and support high yielding sectors such as energy and utilities, which are mostly state-owned, according to Bloomberg Intelligence Strategist Marvin Chen. “Southbound flows already account for around 15% of turnover in Hong Kong, and may rise once this is implemented.” 

Chinese names with the highest dividend yield included China Construction Bank Corp, China Petroleum & Chemical Corp and Industrial & Commercial Bank of China Ltd, according to data compiled by Bloomberg. Developers Hang Lung Properties Ltd, Henderson Land Development Co Ltd and Link REIT were among the Hong Kong firms generating most yield.

While the tax break might help some high dividend Hong Kong stocks, Abrdn Investment Director Xin-Yao Ng cautioned that they haven’t caught any major attention from mainland Chinese investors in the past.

An average of HK$31 billion a day traded via southbound link in the first quarter (1Q), down 17% from a year earlier, according to the HKEX quarterly report. HKEX’s 1Q profit slumped 13% year-on-year, and its share price is still down 53% from early 2021. 

Hong Kong’s SFC chairman Tim Lui first made the suggestion to cut the dividend tax in March in his capacity as a delegate to China’s National People’s Congress. He also called on regulators to lower the investor threshold for the trading link to allow more participants. 

  - Bloomberg