Hong Kong moved unexpectedly to raise taxes on share trading by 30%, putting a damper on the city's stock-exchange operator just as it was unveiling record annual sales and profits.
A surge in trading and new listings has buoyed Hong Kong Exchanges and Clearing Ltd., which has grown to become the world's largest exchange operator based on its own market valuation, and the fourth-biggest by value of companies listed on its exchange.
The group's ascendance also reflects the rise of China's financial markets to become some of the world's biggest and most important after those in New York.
On Wednesday, however, Hong Kong's government spoiled what should have been a victory lap for Hong Kong Exchanges. The government appoints half of the company's board, including its chairman, and holds a stake in the business.
Paul Chan, the city's financial secretary, proposed lifting the so-called stamp duty on stocks to 0.13% from 0.1%, as part of Hong Kong's annual budget. Hong Kong is reeling from the effects of the pandemic and earlier social unrest, with its economy shrinking by a record 6.1% last year.
The looming tax increase pummeled Hong Kong Exchanges shares, even as it reported the equivalent of $1.48 billion in net profit for 2020, a 23% increase and its biggest-ever haul.
The company's stock, which has recently hit record highs, fell as much as 12% before paring some losses to stand 10.4% lower in midafternoon trading. The city's benchmark Hang Seng Index, which recently hit its highest since June 2018, fell 3.6%.
The tax increase will likely hurt smaller brokerages and individual investors who make daily bets on stocks, said Christopher Cheung Wah-fung, chief executive officer of Christfund Securities and a lawmaker who represents brokerages in Hong Kong.
Still, he said it was unlikely to affect Hong Kong's overall competitiveness, given the city doesn't impose capital-gains taxes. "It's a way for the government to generate more immediate income amid rising trading volumes, as it needs to offer more handouts amid the economic downturn," Mr. Cheung said.
Hong Kong Exchanges said it was disappointed by the decision but recognized the levy would be an important source of government revenue. "HKEX looks forward to continue working closely with all its stakeholders to drive the continued success, resiliency, vibrancy and attractiveness of Hong Kong's capital markets," a spokesman said.
Mr. Chan, the financial secretary, said in his budget speech that the government had considered the impact on the market and the city's international competitiveness, and would continue to develop the securities market.
Stock trading in Hong Kong has boomed recently, hitting a fresh record on Monday, with the equivalent of $39 billion of main-board shares changing hands.
Mainland Chinese investors have helped bolster activity, pouring money into Chinese stocks that are cheaper, or only available, in the offshore market. In January, such buying through a trading link known as Stock Connect hit $40.1 billion, according to data provider Wind, the highest monthly total since the program began in 2014.
Write to Joanne Chiu at joanne.chiu@wsj.com
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