Hong Kong-listed finance stocks post Friday rebound, but sector overhang remains

Insurance and banking stocks trading in Hong Kong were sold off following a Caixin report that several municipalities had begun applying personal income taxes on dividends and interest earned on offshore insurance products.

Financial large cap stocks AIA Group and Prudential dropped 6 and 9 percent respectively last week but managed to recover losses on Friday after authorities clarified that the 20 percent levy was not a new policy, which was reaffirmed by both the Hong Kong Insurance Authority and China’s State Taxation Administration.

[See more: Mainland-Hong Kong capital market ties to benefit from new measures]

In the wake of the report, analysts have maintained that the investment fundamentals of Hong Kong’s insurance industry remain intact, highlighting the value proposition to onshore investors. Even after applying the tax, Hong Kong dollar or US dollar denominated policies still offer a sizable spread, with 10-year US treasury yields trading at a 2.9 percent premium to the Chinese equivalent, writes Michael Chang of CGS International, in a sector note published Thursday.

Besides the gap, US dollar denominated policies present other advantages, including currency and offshore wealth diversification strategies that underpinned their attraction, the analyst said. Given that mainland business accounts for about a fifth of AIA Group and Prudential’s new insurance business, Chang added that based on his estimates, a 5 percent share price drop implies a 20 to 30 percent loss in mainland Chinese visitor purchases, underscoring the market’s overreaction.

Investor jitters

But while the announcement might ease concerns that offshore insurance products were not outright banned, until additional details are announced, a sector overhang could linger, putting pressure on more liquid Hong Kong stocks.

Back in May, unlicensed offshore brokers in Hong Kong were collectively fined more than US$330 million after the China Securities Regulatory Commission escalated its regulatory oversight in a policy shift aimed at closing capital loopholes and combating regulatory arbitrage.

[See more: Hong Kong begins trading offshore China Government Bond futures]

Yet, regulatory scrutiny comes amid broader efforts to support market liquidity. The Caixin report coincides with the Hong Kong Exchange’s introduction of offshore Chinese government bond futures. A month earlier, the People’s Bank of China expressed its desire to open the Southbound Connect to more mainland investors.

Even as banks tighten new offshore accounts, HSBC’s interim results showed that its branches opened over 640,000 new client accounts this year.