The Chinese Mainland’s middle-class continues to grow, as does the nation’s ranks of high-net-worth individuals. Many of these wealthy citizens are located in Guangdong, and therefore present a potentially deep source of new clients for Hong Kong’s financial firms, thanks to the latest step in the opening up of the Greater Bay Area (GBA).
The Wealth Management Connect scheme, announced on 29 June, will enable residents in Hong Kong, Macao and the nine cities in Guangdong Province to invest in wealth management products across the whole GBA. The biggest impact of the scheme is likely to be southbound, with Mainland citizens expanding their investment horizons through financial companies based in Hong Kong.
As Peter Churchouse, Managing Director of Portwood Capital, points out, there is a lot of money up for grabs.
“Financial assets held in private hands in China are in the region of US$3.25 trillion,” he said. “So you can imagine what the impact of that might be if the whole country was able to buy mutual funds through a Hong Kong broker or bank. There could be quite a substantial impact for the financial service industry in Hong Kong.”
Looking at the GBA, according to last year’s Hurun Report, there are 285,000 high-net-worth households (with more than 10 million RMB) in Guangdong Province, and more than 679,000 “affluent” households, with at least 6 million RMB.
“So you’ve basically got a million households with 6 million RMB or more to invest. It is quite a sizeable market,” Churchouse said. “I think you’ll find quite a lot of people in China will want to participate in the Wealth Management Connect programme when they find out how it works.”
Angel Ng, CEO, Citi Hong Kong & Macau, also anticipates that the scheme will open new prospects for the financial sector in Hong Kong.
“With the creation of the Wealth Management Connect scheme, there are tremendous opportunities for banks and financial services companies in Hong Kong to make available for sale a wide range of wealth products, including mutual funds and insurance products, in the Greater Bay Area – an economically wealthy region that contributes 12% of China’s GDP,” she said.
Sally Wong, CEO of the Hong Kong Investment Funds Association, said that China is at an “inflection point” when it comes to investing. Affluent residents in the Greater Bay Area probably already own property at home, and will be looking for new opportunities.
“Domestically, the choices are rather limited, so the need to look offshore becomes more pertinent,” Wong said. “And Hong Kong is best placed to serve these needs because we have a robust platform, offering a wide array of products, and that are easily accessible. And we have a deep pool of expertise – from investment management to advisory, from risk management to safekeeping of assets – who can render the necessary support to help meet their investment needs.”
The full details of eligible products have not been released yet, but they are expected to be relatively simple and low risk products to start. Wong said that she hoped all “plain-vanilla funds” offered by Hong Kong Securities and Futures Commission will be included – not just Hong Kong-domiciled funds. A wider range of fund products will not only give GBA investors more choice, but it will foster greater market competition and greater economies of scale, which will again benefit investors, she added.
The banks and asset managers in Hong Kong that offer the eligible financial products will be the immediate beneficiaries of the new scheme, but many areas could see growth.
The additional flows of capital into Hong Kong will create “more jobs and more opportunities in the financial services for all sorts of people,” Churchouse said. “Not just stockbrokers, but also for hedge fund managers, mutual fund managers, insurance people, accountants and lawyers.”
Hong Kong’s crucial role
Providing the solid foundation to the Wealth Management Connect is Hong Kong’s long experience in financial services and as the gateway between the Mainland and the rest of the world. This role as the financial centre of the region was reinforced in the Greater Bay Area blueprint, released in April last year.
“With the launch of this scheme, we can see the plans laid out in the GBA blueprint continuing to come to fruition,” said Chamber CEO George Leung. “The Wealth Management Connect will provide many more opportunities for residents across the whole GBA to expand their investment horizons, as well as boosting Hong Kong’s financial service sector.”
The city’s status as a world-class financial hub will underpin the success of the Wealth Management Connect, Leung added. “Hong Kong is uniquely placed to serve the financial needs of investors from both sides of the border and beyond, with the knowledge and skilled professionals required to make the scheme a success.”
Agnes Chan, Managing Partner, Hong Kong & Macau, at Ernst & Young China, said that although the Mainland’s financial sector is gradually opening up, Hong Kong will continue to be an essential stepping stone. “It also acts as a global offshore RMB business hub, as an international asset management centre, and a risk management centre.”
The Wealth Management Connect could also provide good reasons for overseas firms to expand their base in Hong Kong, Chan added.
“We expect that the scheme will attract more global private banks and fund managers to set up subsidiaries in Hong Kong, to tap into the GBA market with its population of over 70 million people,” Chan said.
Citi’s Ng also said that the Wealth Management Connect could reinforce the city’s financial-hub credentials around the world.
“With its well-established infrastructure and financial system, as well as attractive tax incentives for corporates, Hong Kong’s position as an ideal location for foreign companies to set up regional headquarters and corporate treasury centres will only be further strengthened as a result of the Greater Bay Area master plan,” she said.
“The city will continue to serve as a hub for firms that are looking to tap the opportunities arising from GBA; and for emerging GBA companies looking to expand in overseas markets.”
Building on Stock and Bond Connect success
The Wealth Management Connect scheme follows on from the Stock Connect, launched in 2014, and Bond Connect in 2017, which have already enhanced regional capital markets even in their short time of operation, explained Chan.
“Both schemes have resulted in increased capital flows in recent years, especially following the successful inclusion of A shares into various major international stock indices,” she said.
Northbound turnover in the Stock Connect reached 9,757 billion RMB in 2019, up 109% from 2018, and the Southbound turnover also reached 2,481 billion RMB, Chan explained, while the Bond Connect also saw significant growth in 2019. So it seems reasonable to assume that the Wealth Management Connect will attract investors once it is up and running.
It seems likely that most of the flow will be southbound, as Mainland investors take advantage of the wider range of investment products here in Hong Kong. But Hong Kong and overseas investors will also find opportunities north of the border.
Portwood Capital’s Churchouse remarked that the northbound aspect may prove to be interesting as the scheme develops. “It might allow Hong Kong investors to put money into tech stock start-ups and private equity ventures in the Greater Bay Area, which could be attractive for a lot of investors in this part of the world.”
Limits in place
Despite the amount of capital potentially available, Churchouse pointed out that there will be restrictions, such as on the amount of cash that is allowed to cross the border. The products will also be available only to investors with a certain level of funds.
“They will have to determine eligibility criteria for people taking their money out of China, as China does not have an open capital account,” he said.
Chan agreed, saying that the most critical barrier is the restriction of funds flow. “Although currently there are special zone areas like in Henquin or Qianhai, and tailor-made channels like via Stock Connect or Wealth Connect, this remains an important factor which limits the potential of a full-gear enablement of the cross-border business.”
Some of the hurdles in place are the same as those that impact all cross-border GBA issues – the fact that the Mainland, Hong Kong and Macao have different legal systems, infrastructure, customs and regulatory systems.
Talent flow is a continuing issue, and if the GBA is to fulfil its potential, people from across the region will need to be able to move and work more freely, Chan said. To aid this, reciprocal recognition of qualifications will need to be expanded, or a common set of qualifications for professionals in specific industries established.
“One example would be to establish a single qualification for Wealth Management people in the Bay Area, so that they can be endorsed for conducting their work within the region, thus allowing and facilitating the Bay Area connectivity initiatives.”
Gradual impact
Although the Wealth Management Connect scheme offers tremendous potential, it will not have an overnight impact. Financial firms will have to develop new products and then market them, which will take time, while the various restrictions will limit the scope of the programme at first.
However, the scheme may well be expanded beyond the GBA in the future, greatly increasing its potential.
“Once Wealth Connect starts to operate smoothly and bring in benefits for Hong Kong, Macao and Guangdong Province, we hope the scheme can be extended to other cities of Mainland China,” Chan said.
And besides a bigger geographical span in the future, it is also likely that, over time, the eligibility criteria and quotas will be relaxed, allowing the Wealth Management Connect scheme to gradually grow and develop.
“It is not going to suddenly open the floodgates,” Churchouse said. “But the scheme is going to add to the investment management part of the economy here in Hong Kong that has already been growing. And you can imagine this is going to be a big job creator, and a big income creator.”