The nation’s central bank, the People’s Bank of China, the Hong Kong Monetary Authority and the Monetary Authority of Macao, in a joint announcement in late June, injected fresh impetus into the operations of the mega Guangdong-Hong Kong-Macao Greater Bay Area, setting in motion a Wealth Management Connect pilot scheme for the region.
The two-way cross-boundary scheme, underscoring Hong Kong’s unique role in meeting the asset management needs of residents on the mainland, has been hailed by the fund-management industry, saying the entire value chain of the SAR’s financial and professional services sectors can now tap the enormous business potential offered by the program.
“This cross-boundary investment scheme will be a boon for Hong Kong’s fund-management industry which is constrained by its limited market size,” said Bruno Lee, chairman of the Hong Kong Investment Funds Association.
“Besides, it will lift Hong Kong as Asia’s fund industry hub as global fund-management players set foot on the Chinese mainland market,” he told China Daily.
Mainland fund-management companies can complement each other in their operations, while fund managers in Hong Kong can utilize their international experience in investment, product knowledge, talent training and customer services to upgrade the business skills of the financial industry on the mainland.
Hong Kong Financial Secretary Paul Chan Mo-po said the Wealth Management Connect offers more incentives for international financial institutions to operate in Hong Kong and step up investments in the city so as to serve the large investor base in the Bay Area. “This will, in turn, strengthen Hong Kong’s role as a world asset-and-management center, as well as an important gateway for capital flowing into and out of the mainland.”
Under the scheme, residents in Hong Kong, Macao and the nine Bay Area cities in Guangdong province could invest in wealth management products distributed by banks in the area.
The PBOC, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission, the State Administration of Foreign Exchange, the HKMA, the Hong Kong Securities and Futures Commission and Monetary Authority of Macao will discuss and decide on operational details of the scheme, including investor eligibility, modes of investment, the scope of eligible investment products, investor protection and handling of disputes under the Northbound and Southbound Wealth Management Connect.
The formal launch date for the Wealth Management Connect and implementation details will be announced later.
The pilot scheme will adopt a closed-loop cross-boundary renminbi fund flow model with cross-boundary currency conversion conducted in offshore markets. The designated remittance will be bundled to each investor account set up in banks in the Bay Area to ensure that relevant funds will only be used to invest in eligible investment products.
Cross-boundary fund flows under the Northbound and Southbound Wealth Management Connect will be subject to aggregate and individual investor quota management. The aggregate quota will be adjusted through a macro-prudential coefficient.
It’s expected the investment scheme will initially focus on simple and relatively low-risk investment products.
Mainland financial regulators are also discussing pertinent issues, such as the issuance of salesperson licenses that permit bank employees in Hong Kong, Macao and the nine Guangdong cities to conduct reciprocal wealth management product sales. The program may also involve issuing licenses to third-party online investment services platforms.
“We expect the Wealth Management Connect, at least, to replicate if not exceed the growth seen with the Stock Connect and the Bond Connect in the next few years. The recent explosive increase in global liquidity, as evidenced by the expansion of central bank balance sheets, could further accelerate these developments,” said a research report by UBS Global Wealth Management.
“The major capital market connect programs are essentially nationwide in focus, whereas the Wealth Management Connect focuses primarily on residents in the city-cluster area with greater financial needs to increase overseas assets in their investment portfolios,” said Lee.
The Qualified Domestic Institutional Investor scheme, launched in 2006, allows mainland investors to have exposure to overseas assets via financial products intermediated by domestic institutional investors, such as fund managers, insurance companies, securities companies and other asset-management institutions. An investment quota has to be approved by the China Securities Regulatory Commission for each financial institution. However, these basically belong to onshore products which are not direct offshore products that yield few benefits of diversification.
The Mainland-Hong Kong Mutual Recognition of Funds scheme, set up in 2015, went further by allowing mainland investors to purchase offshore Hong Kong-domiciled mutual investment funds directly.
According to the State Administration of Foreign Exchange, the total northbound net flow since the MRF’s launch has reached 16.76 billion yuan (US$2.40 billion), while the total southbound net flow amounted to just 286.14 million yuan by February, indicating mainland investors have been buying Hong Kong-based funds more than their Hong Kong counterparts have been purchasing mainland-based funds.
“The Wealth Management Connect may enable Bay Area residents to invest in Hong Kong’s regulated mutual investment funds, not necessarily funds domiciled in the city, thus drastically enlarging the universe of offshore mutual fund investments,” said Lee.
More than 2,000 funds authorized by the SFC in Hong Kong are set to benefit if they’re sold throughout the Bay Area, with US$1.7 trillion in assets under investment spanning different asset classes, markets, investment strategies and currencies.
According to a mainland wealth report last year, the Bay Area accounted for more than one-fifth of the nation’s high-net-worth households with assets of 10 million yuan or more.
“The Wealth Management Connect will further open up the market for the wealth-management business in the city-cluster area and facilitate the banking industry’s cultivation of new growth drivers,” the Hong Kong Association of Banks said.
“There are significant opportunities for the asset managers and insurers who create these wealth management products, as well as the banks which distribute them. We welcome the fact that the Wealth Management Connect continues to be a key initiative,” said PwC Hong Kong partner Josephine Kwan.
“Hong Kong continues to be seen as a leading asset-management center. Close collaboration and active engagement between industry stakeholders is key in order to take the sector to the next level,” said KPMG China’s vice-chairman and global head of asset management Andrew Weir.
This Bay Area is home to more than 70 million people with a per-capita gross domestic product of US$23,000, or a combined GDP exceeding US$1.6 trillion in 2018 — accounting for 12 percent of the nation’s GDP.
