Hong Kong hiked stamp duty on stock trades Wednesday for the first time in almost three decades as it tries to plug a pandemic-induced record budget deficit, sending the local equity market tumbling.

The business-friendly financial hub, which prides itself on low taxes and no capital gains tax, has been battered for two years by long-running political unrest and then the coronavirus, putting a huge strain on government coffers.

In a bid to shore up finances, finance chief Paul Chan said he would lift the levy on share transactions to 0.13 percent from 0.1 percent, the first increase since 1993.

The news sent the Hang Seng Index plunging more than three percent, while bourse operator HKEx collapsed more than 11 percent at one point.

"Whilst we are disappointed about the Government's decision to raise stamp duty for stock transactions, we recognise that such a levy is an important source of Government revenue," a spokesperson for HKEX said.

The economy contacted a record 6.1 percent in 2020 but Hong Kong was already suffering going into the year, having been hit by months of sometimes violent pro-democracy protests that caused much of the city to be shut down for extended periods.

Hong Kong's government has been forced to shore up its coffers after protests and pandemic hammered the city's economy
Hong Kong's government has been forced to shore up its coffers after protests and pandemic hammered the city's economy AFP / Anthony WALLACE

The pandemic's impact was compounded by geopolitical tensions as Beijing sought to stamp out dissent in the city by introducing a controversial security law that has led to questions being asked about its future as a global financial hub.

The government went into the pandemic with one of the healthiest fiscal reserves in the world but fell into a record deficit of HK$258 billion ($33 billion) last year as officials splurged to prop up the economy.

However, the stock market has been one of the best performers this year, as global equities have soared on optimism that the rollout of vaccines, falling infection rates and the easing of lockdowns will fuel a strong economic recovery around the world.

And Chan struck an optimistic note for the economy this year, predicting it will expand between 3.5 and 5.5 percent.

The city is planning to start its vaccination programme on Friday and hopes are high the city may be able to make its way out of onerous social distancing measures that crippled business for much of the past year.

Chan announced spending measures of more than HK$15.5 billion this year to alleviate economic hardship for city residents -- around half what was spent last year.

A further US$1 billion has been set aside to help secure "national security".