Hong Kong's Financial Secretary has delivered a budgetary proposal to extend the stamp duty concession on ETFs in order to promote "healthy growth" in the market but it looks likely to affect less than 10% of ETFs.

On 24 February 2010, John Tsang, Hong Kong's financial secretary, said he wanted to reinforce the SAR's position as a financial centre and promote the asset management business. The first proposal on his list of measures was to extend the stamp duty concession on ETFs to include all those that track indices comprising not more than 40% of Hong Kong's stocks. Prior to this ETFs with Hong Kong stocks in their portfolios, regardless of the weightings, are not entitled to this concession. However, out of 50 ETFs currently listed in Hong Kong the concession will affect less than five.

Joseph Ho, head of ETF marketing and sales for Lyxor ETF, said only a quarter of Hong Kong listed ETFs currently paid stamp duty and so the vast majority were already exempt before the Budget announcement. He added: "Investors in cross-listed ETFs, like Lyxor ETF, have never had to pay any stamp duty as they don't involve Hong Kong-based assets - they invest in places such as India or Korea etc but not Hong Kong."

One of the few to benefit directly from the concession is iShares, although it was unable to confirm how many of its products would be affected as it was still trying to confirm the final details. Nick Good, managing director of BlackRock and head of iShares, Asia Pacific, said: "It is something we have felt for a long time would be a positive step to enhance the competitiveness of Hong Kong as one of the major ETF hubs in Asia. We have seen it implemented in other jurisdictions already, and we think it will help both the attractiveness of new products that use Hong Kong underlyings and the liquidity of products."

Ho agreed it was useful insofar as the amount of Hong Kong content within domestically domiciled ETFs that triggers stamp duty charges has been clarified. However, he said he believed stamp duty charges were not a key factor for investors when choosing an ETF, and that investors will choose an ETF because they like the market it follows.

"To the retail investors, it is like the Government trying to support the Hong Kong film industry and offering people a discount of 10 cents to go and see a movie which costs $80 per ticket," he said. "It may be a nice gesture, but no-one is going to go and see a movie because of that. The stamp duty wavier is more beneficial to the proprietary traders and market makers so if the intention of the Government is to help the ETF industry, the waiver should be extended to all ETFs."

However, Ronald Arculli, chairman of the Hong Kong Stock Exchange, said the budget proposals related to financial services would help reduce trading costs of some of the products listed on the Exchange and help Hong Kong maintain its position as a leading international financial centre. He added: "Extending the waiver of stamp duty on the trading of Exchange Traded Funds (ETFs) with no Hong Kong stocks in their portfolios to include ETFs that track indices comprising not more than 40% of Hong Kong stocks will encourage the further development and diversification of our ETF market."