China's Offshore Trust Tax Deadline Poses Risk to Individual Stocks, BofA Warns

A new Chinese regulation targeting income tax on offshore trusts could create short-term selling pressure on specific U.S. and Hong Kong-listed Chinese stocks as a key payment deadline approaches, according to an analysis by BofA Securities.

New Tax Rule Creates Stock-Specific Risks

Chinese authorities in July announced they would impose individual income tax on assets placed in offshore trusts, a structure commonly used by shareholders of Chinese companies listed abroad. The rule also applies to any income generated by these trusts.

A 90-day window was provided to settle unpaid taxes, setting a deadline of October 22. At a media briefing in Hong Kong, BofA Securities China Equity Strategist Winni Wu told Reuters this could result in "event risks on single stocks" as the date nears.

Haidilao Sale Fuels Market Concerns

Market concerns were recently amplified by a significant share sale at hotpot chain Haidilao. A major shareholder unexpectedly sold 259 million shares this month, raising HK$2.75 billion ($350.59 million).

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Following the transaction, the company's shares have declined by 17%. This has fueled market speculation that the divestment may be linked to the need for liquidity to cover potential tax liabilities under the new rule.

Limited Systemic Impact Expected

Despite the potential for volatility in individual names, BofA does not foresee a broad market downturn from the policy. Wu stated the tax collection is "unlikely to be a dominant driver for the Hong Kong market" as a whole.

The bank's analysis suggests that privately-owned companies are more likely to be scrutinized under the new rule, whereas state-owned enterprises are expected to be less impacted. Wu also noted there may be room for shareholders to negotiate payment terms with local tax bureaus, as some liabilities could be too high to pay immediately in cash.