Is the adjustment in Hong Kong stocks triggered by 'short essays' an opportunity?

During the morning session on February 3, 2026, the Hang Seng Tech Index once fell by more than 3%. The reason was a market rumor about 'possible increases in VAT rates for internet value-added services such as gaming and advertising to 9% or even higher, drawing parallels with the liquor consumption tax', which caused significant fluctuations in Hong Kong's tech sector.

$TENCENT (00700.HK)$ 、$KUAISHOU-W (01024.HK)$ 、 $BIDU-SW (09888.HK)$, Bilibili (09626.HK),$BABA-W (09988.HK)$ Leading stocks saw significant declines. Although such rumors have appeared before and have been repeatedly debunked, coupled with market sensitivity to policy uncertainty, both the Hang Seng Index and the Hang Seng Tech Index came under pressure simultaneously. Is this decline driven by rumors a window for strategic buying due to panic selling, or a harbinger of pressure on industry fundamentals?

Are the rumors about tax increases credible?

The reason these rumors caused market fluctuations lies in investors' long-term concerns about policy regulation in the internet industry. However, from the perspective of legal basis and policy direction, the likelihood of implementation is not high.

The 'Value-Added Tax Law of the People's Republic of China,' which will officially take effect on January 1, 2026, has clearly defined three tax rate brackets: 13% (goods), 9% (basic telecommunications, construction, transportation, etc.), and 6% (modern services, including finance, advertising, and gaming). Internet value-added services such as gaming and advertising fall under the category of modern services. Any adjustment to tax rates requires rigorous legislative or administrative procedures and is far from being arbitrarily speculated by the market.

Looking back at history, similar rumors about increased tax rates for the internet sector have surfaced multiple times but never materialized. The spread of these rumors this time may be more about the transmission of market panic rather than a clear signal from the policy front.

The market's comparison between raising VAT on internet services and consumption taxes on liquor essentially confuses the core positioning and regulatory logic of the two types of taxes. There are fundamental differences in taxable objects, taxation methods, and policy objectives, making it impossible to simply equate them.

In terms of taxable objects, VAT is a turnover tax covering the entire chain of production, circulation, and service of goods, targeting the added value of goods or services. It is a neutral tax characterized by 'universal collection,' with its core role being revenue generation while ensuring tax fairness. Both internet value-added services and basic telecommunication services fall within this scope. On the other hand, consumption tax is a specific regulatory tax imposed only on certain products like tobacco, alcohol, and high-end cosmetics, focusing on guiding consumption behavior and adjusting income distribution. Liquor, as a high-value-added consumer product, carries evident regulatory attributes through its consumption tax, differing significantly from the inclusive and innovative positioning of internet services.

From the perspective of tax calculation and transmission logic, VAT operates as an ex-tax system, allowing businesses to reduce their actual tax burden through input tax credit, with the ultimate tax burden mostly borne by end consumers. The impact of rate adjustments on corporate profitability needs to be assessed in conjunction with the structure of input tax credits. In contrast, consumption tax typically adopts an inclusive tax approach, calculated based on sales revenue or volume and directly counted as part of business costs, thus having a more direct impact on corporate profits. The difference in policy goals between the two is significant. Applying the regulatory logic of liquor consumption tax to internet VAT represents a classic misinterpretation of tax categories.

The current macro-policy focus is on 'stabilizing growth, promoting consumption, supporting the platform economy, and fostering AI innovation.' Imposing additional taxes on high-margin internet businesses would likely pass costs onto consumers, suppressing digital consumption and contradicting the strategy to expand domestic demand. Implementing across-the-board tax increases on key industries at this stage goes against the overall policy logic, undermining both industry stability and market confidence.

The recent adjustment of the basic telecommunication services tax rate from 6% to 9% by the three major operators has been mistakenly interpreted by some market participants as a precursor to 'increased tax rates for the internet industry.' However, the essence of this adjustment is the reclassification of tax items rather than the addition of new tax burdens and is entirely unrelated to the tax rate logic of internet value-added services.

The core background of this adjustment is that mobile data, SMS/MMS, and internet broadband access services were previously categorized as 'value-added telecommunication services' and taxed at a rate of 6%. However, in terms of the nature of these services, they are fundamental functions for users accessing communication networks, rather than additional value-added services layered on top of basic networks. This created a discrepancy between tax classification and the actual attributes of the services. The adjustment announced in Announcement No. 9 of 2026 by the Ministry of Finance and the State Administration aims to correct previous misclassifications, aligning taxation policies with the attributes of telecommunications services and achieving standardization of industry tax administration. It should not be interpreted as a tax increase at the policy level.

It is worth noting that the business attributes and tax classifications of internet value-added services and basic telecommunications services are entirely different: the former falls under information technology services and cultural creative services within modern services, where the application of a 6% tax rate is both legally stipulated and consistent with industry characteristics; the latter belongs to the foundational categories of communication services, and after the adjustment, it aligns with the 9% tax rate applied in industries such as transportation and postal services. The logic behind the tax rate adjustments for these two categories is unrelated, and thus it cannot be inferred that the tax rate for internet value-added services will follow with an increase.

Transmission effect of tech stock declines on Hong Kong's broader market indices: Concentrated weightings exacerbate volatility

Despite the lack of credibility in tax rate rumors, the collective decline in large-cap tech stocks in Hong Kong still significantly impacted the Hang Seng Index and the Hang Seng Tech Index, primarily due to the extremely high weighting of tech stocks in these two indices.

For the entire trading day, the Hang Seng Tech Index fell by 1.07%, partially eroding its year-to-date gains.

As the core broad-based index of Hong Kong stocks, the Hang Seng Index covers multiple sectors including finance, energy, consumption, and technology. However, in recent years, the weighting of tech stocks has been continuously increasing, creating a competitive balance with financial stocks.

HSBC Holdings (00005.HK), Alibaba, and Tencent are the components with the highest weightings in the Hang Seng Index. On the day, Alibaba and Tencent dropped by 1.41% and 2.92% respectively, offsetting HSBC’s daily gain of 3.12%. Additionally, Meituan (03690.HK) and Xiaomi (01810.HK), both with weightings exceeding 3%, declined by 1.74% and 1.31% respectively, dragging down the overall performance of the Hang Seng Index. Therefore, despite strong performances from heavyweight financial stocks like HSBC and AIA (01299.HK), the Hang Seng Index closed with only a modest increase of 0.22%.

Hong Kong stocks trade at a significant discount compared to U.S. stocks, highlighting the cost-performance ratio of the technology sector

Following this decline, the valuations of Hong Kong stocks, particularly technology stocks, have further widened their discount relative to their U.S. counterparts.

According to Wind data, the Hang Seng Tech Index has fallen cumulatively by 0.88% since the beginning of 2026, while the Nasdaq Index (IXIC.US), which reflects the performance of U.S. technology stocks, has recorded a cumulative gain of 1.51% so far this year.

The price-to-earnings ratio of the Hang Seng Tech Index is only 23.22 times, while that of the Nasdaq Index is as high as 41.60 times.

Taking individual stocks as an example, Tencent, which has fallen 3.01% year-to-date, may have a forward price-to-earnings ratio of around 21.3 times for 2025, whereas Meta (META.US), which has risen 7.02% this year, has a price-to-earnings ratio as high as 29.6 times. We also noticed that heavyweight US stocks such as NVIDIA (NVDA.US), Microsoft (MSFT.US), Amazon (AMZN.US), and Google (GOOG.US) all have price-to-earnings ratios above 30 times, while Alibaba and Tencent have price-to-earnings ratios of only about 20 times, indicating significant valuation discounts for Chinese tech stocks.

Conclusion: Short-term sentiment fluctuations, long-term opportunities highlighted

The rumors about the increase in the tax rate for internet value-added services are highly unreliable due to confusion over tax types and violation of legal and policy logic. The collective decline in large technology stocks in Hong Kong is driven by short-term emotional irrational fluctuations. From the perspective of index impact, the weight advantage of technology stocks caused short-term pressure on the Hang Seng Index and the Hang Seng Tech Index, but this fluctuation does not change the long-term support logic of Hong Kong stocks—solid fundamentals of constituent stocks, advantageous valuations, and continuous improvement in global liquidity and exchange rate environment.

The valuation discount between Hong Kong and US indices has further widened after this decline, making the investment attractiveness of Hong Kong stocks stand out. For long-term investors, the decline caused by short-term sentiment fluctuations presents a window of opportunity to position in quality assets; for short-term investors, it is necessary to be wary of the risk of pullback after sentiment recovery, focusing on catalysts such as clarification of rumors and corporate earnings.

Overall, the core opportunity in Hong Kong stocks lies in the resonance between the repair of valuation discounts and the improvement of industry fundamentals. As the core of this impact, the internet technology sector is expected to become the leading force in the rebound of Hong Kong stocks as sentiment stabilizes and profits materialize. Market noise is often the touchstone of value investing; holding onto quality assets amidst panic ensures capturing long-term returns.

Text: Wu Yan

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