With enhanced capital market connectivity between Hong Kong and the Chinese mainland, the SAR’s competitiveness as a global financial hub has been given a shot in the arm. Oswald Chan reports from Hong Kong.

An office complex of the Hong Kong Stock Exchange is seen in Central. (PHOTO PROVIDED TO CHINA DAILY)

The recent launch of the Southbound Bond Connect and the Cross-boundary Wealth Management Connect Pilot Scheme in the Guangdong-Hong Kong-Macao Greater Bay Area heralds a new epoch in financial integration across the border.

Since Sept 24, eligible Chinese mainland institutional investors have been able to plow their money into Hong Kong’s bond market through the Southbound Bond Connect with a daily quota of 20 billion yuan ($3.1 billion) and an annual quota of 500 billion yuan.

As connectivity strengthens across the Greater Bay Area, the banking sector will strive to enhance investor education, and promote cross-border acceptance of qualifications and talent development

Luanne Lim, Hong Kong Association of Banks chairperson

The scope of products under the Southbound Bond Connect is wider than expected, as qualified onshore investors can trade not only in Hong Kong dollar or yuan-denominated bonds, but also in foreign currency-denominated bonds, exceeding market expectations in the extent of liberalization.

Alvin Cheng, fixed-income portfolio manager at Fidelity International, said the Southbound Bond Connect can bring a host of benefits for onshore investors in terms of liquidity, risk-return profile, industry spectrum and maturity. Bonds traded in Hong Kong are more diversified in denominated currencies, as well as issuers, including international enterprises and financial institutions apart from their mainland and Hong Kong counterparts.

Besides investment benefits, the Southbound Bond Connect, from the financial infrastructural link perspective, helps to internationalize the renminbi and promote the bond market, which the Hong Kong government is eager to develop.

“The launch of the Southbound Bond Connect will help attract new funds, and increase turnover and bond liquidity, invigorating the Hong Kong bond market. Qualified onshore investors can also subscribe for offshore bond offerings through the Southbound Bond Connect, which will attract more issuers to conduct bond financing in the city and further strengthen Hong Kong’s status as a global financial center,” ICBC International said in a report on the bond market.

Hong Kong Financial Services Development Council Chairman Laurence Li said, “I hope the implementation of the Southbound Bond Connect will incentivize renminbi-denominated bonds in Hong Kong, thereby accelerating the renminbi internationalization process.”

The value of bonds issued in Hong Kong last year was $196 billion, ranking first in Asia in terms of the amount of international bond issuances arranged. As for green finance, the amount of green debt financing arranged in the city hit an annual record high of $12 billion in 2020, according to Hong Kong government statistics.

Another milestone reached is the Cross-boundary Wealth Management Connect Pilot Scheme in the Greater Bay Area, which allows eligible residents in Hong Kong, Macao, and nine cities of Guangdong province to invest in low-risk investment products sold by banks in each other’s markets. Banks introduced such services on Tuesday.

Opportunities abound

The Hong Kong Monetary Authority said that 18 banks in the city launched cross-border wealth management connect services on Tuesday, with their respective mainland partner banks’ eligibility confirmed by mainland regulatory authorities.

On Tuesday, the services’ first business day, 128 southbound remittance cases involving 177.3 billion yuan ($27.78 billion) were recorded, as were 180 northbound remittance cases involving 153.8 billion yuan, according to the People’s Bank of China.

The wealth management connect plan is an important step toward fulfilling Hong Kong’s potential as Asia’s premier wealth management pivot.

“The launch of this new program will widen the scope of investment opportunities available to clients in the Greater Bay Area, and is an important step in realizing the region’s potential to become a leading global hub of wealth creation and management,” said Amy Lo, executive committee chairman of the Private Wealth Management Association.

Alexa Lam, Asia-Pacific chief executive at ICI Global — the association representing regulated funds globally — echoed those sentiments. “Hong Kong’s asset management industry is excited at the opening of what is effectively a brand-new market. I believe many will take advantage of this tremendous opportunity, which will help develop financial and investment services and talent, and allow for easier movement of people and services within the Greater Bay Area,” she said.

“To be successful, it will be critical for fund managers to identify bank distributors within the Greater Bay Area, establish a partnership, train them on their products and ensure that the banks have a strong protocol in place for conducting product due diligence and onboarding products.” 

Major banks in Hong Kong are flexing their muscles as they each grab a slice of the wealth management pie, thereby raising the standards of the city’s wealth management services.

The Hongkong and Shanghai Banking Corp said that with its 5,000 retail banking employees in the Greater Bay Area, it can provide more than 1,000 selected low-to-medium risk wealth management products of all asset classes to clients.

Citi Hong Kong is working with a partner bank on the mainland and is set to offer over 100 types of wealth management products with a low-to-medium investment risk, including bonds and mutual funds, as well as multiple foreign currencies services. The bank plans to hire more than 1,000 wealth management professionals by 2025.

Bank of China (Hong Kong) Vice-Chairman and Chief Executive Sun Yu said the wealth management connect not only creates a new impetus for the industry in the Greater Bay Area, but also helps to promote the high-quality development of the financial industry in the region, as well as the internationalization of the renminbi.

Hong Kong Association of Banks Chairperson Luanne Lim said, “As connectivity strengthens across the Greater Bay Area, the banking sector will strive to enhance investor education, and promote cross-border acceptance of qualifications and talent development.”

The assets under management of Hong Kong’s asset and wealth management business grew by 21 percent year-on-year to nearly HK$35 trillion ($4.5 trillion) by the end of last year, about one-third of which came from net fund inflows. About 64 percent of the funding sources were from overseas, demonstrating the extent of internationalization of Hong Kong’s asset and wealth management business.

Financial analysts expect such capital market connectivity programs to signal a new chapter in financial infrastructural links between the mainland, particularly other cities in the Greater Bay Area, and Hong Kong.

“The Southbound Bond Connect, along with the Shanghai-Hong Kong Stock Connect, the Shenzhen-Hong Kong Stock Connect, and the Cross-boundary Wealth Management Connect cover a full range of financial products, including equity, bond and wealth management products,” according to ICBC International analysts Angus To, Li Yue and Jasper Chow.

“In future, the interconnection arrangement is expected to consolidate and deepen gradually so as to facilitate financing, fund flows and renminbi internationalization.” 

IPO market gets boost 

The capital market connectivity path between Hong Kong and the mainland started in 2014, with the Shanghai-Hong Kong Stock Connect, the Shenzhen-Hong Kong Stock Connect, Mutual Recognition of Funds, the ETF Connect and the Northbound Bond Connect gradually being rolled out.

These programs have lifted the SAR’s position as an asset management center. Global investors can now access the mainland market, meeting the needs of investors seeking returns and catering to the demands of the vast pool of untapped mainland capital. 

According to Hong Kong government figures, the daily average turnover in northbound trading of the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect soared by more than 90 percent to about 110 billion yuan, while that of the northbound Bond Connect surged 30 percent to 23 billion yuan between July 2020 and June, indicating that international investors have continued to use Hong Kong as a platform for investing in the mainland’s financial markets.

With Hong Kong’s reform of its listing regime that allows biotech companies and those with weighted voting rights to go public, the local IPO market received a major boost. Between July 2020 and June, funds raised through IPOs in Hong Kong had exceeded HK$500 billion — an increase of more than 50 percent compared with a year ago. In the same period, the average daily turnover of Hong Kong stocks surpassed HK$160 billion — almost 70 percent higher than that a year ago.

With a simple and low-tax regime, an easy listing process, an absence of capital controls, a good regulatory framework, and being a financial gateway between the mainland and foreign countries, Hong Kong’s financial hub status has been cemented.

Hong Kong was ranked third in the Global Financial Centers Index published in September — trailing only New York and London in terms of infrastructure, human capital, financial sector development and reputation.

Between July and October 2020, net capital inflows into the Hong Kong dollar market reached more than HK$300 billion. By the end of June, total deposits in Hong Kong’s banking system had exceeded HK$15 trillion — up by almost 8 percent over the previous year — according to the Hong Kong government’s business environment report released in September.

Hong Kong’s foreign exchange reserves rose 10.5 percent to HK$3.8 trillion, equivalent to 1.8 times the Hong Kong dollar monetary base. The city’s banking system has remained robust, with the capital adequacy ratio and major banks’ average liquidity coverage ratio at 19.8 percent and 154 percent, respectively, in the second quarter of this year, both well above the international regulatory standards. The classified loan ratio remained relatively low at around 0.9 percent.

According to the World Investment Report 2021, published in June by the United Nations Conference on Trade and Development, Hong Kong was ranked as the world’s third-largest recipient of foreign direct investment last year, behind only the United States and the Chinese mainland, and up from the fifth place in 2019.

Contact the writer at oswald@chinadailyhk.com