Individual investors, banks and wealth managers are all poised to benefit from the latest Connect scheme linking markets in mainland China, Hong Kong SAR and Macau SAR, as regulators in all three locations push for greater financial integration.
The People’s Bank of China, the Hong Kong Monetary Authority (HKMA) and the Monetary Authority of Macao announced a long awaited Wealth Management Connect scheme on 29 June. The scheme allows mainland China residents in the Greater Bay Area to invest in wealth management products in Hong Kong and Macau, and vice versa.
Few details have been released, but aggregate quotas of CNY150bn (US$22bn) for the flow of capital in either direction and an individual investor quota of CNY1m have been recently set. The stakes are high. HSBC Bank expects the banking cluster around the Greater Bay Area to generate US$185bn in annual revenue by 2025, representing annual growth of around 10%.
It is only the latest in a series of Connect schemes, which link stock markets in Shanghai and Shenzhen with Hong Kong and Macau. The first launched in 2014 while a similar Bond Connect scheme began in 2017.
‘Wealth Management Connect will follow the preceding schemes’ incremental approach, starting with a smooth launch with possibilities for enhancements down the road,’ an HKMA spokesperson says.
The incremental approach requires quotas to be conservative when a scheme launches, but that could change as the scheme evolves and conditions change.
‘The three regulators are currently in the process of putting together implementation details and also consulting the financial industry, with more details to be available as they are finalised,’ the spokesperson says. ‘Non-complex wealth management products with low to medium risk will be offered in the Wealth Management Connect’s initial stage. We aim to be pragmatic and prudent in the design of the scheme features, with proper risk controls.’
‘Mainland China, known as a savings-rich economy, will need to ensure capital is channelled effectively to financial products’
The HKMA is expected to include relatively straightforward products in the initial Wealth Management Connect line-up.
‘We expect the scheme to include simple and non-complex products as per the Securities and Futures Commission definition,’ says Peter Stein, managing director at the Private Wealth Management Association. ‘They will include low to medium-risk products such as forex, fixed income and mutual funds.’
The biggest beneficiaries of the scheme are likely to be investors, banks and investment managers.
Investors will be able to purchase previously inaccessible products and will benefit as these products increase in complexity and distinctiveness.
Banks will play a crucial role in distributing products and are likely to dominate product sales as the ‘first port of call for potential investors’ and could benefit from cross-selling, says Marie-Anne Kong, Hong Kong asset and wealth management leader at PwC. Banks will also be able to partner with investment managers seeking a point of entry into the scheme and act as distribution channels as the scheme evolves, she adds.
For China-based asset managers, the scheme provides access to the sophisticated Hong Kong market – investors who are not resident in Hong Kong account for 64% of assets under management in the city’s asset and wealth management sector. They will have a ‘global target market’ under the scheme, Kong says.
In turn, Hong Kong-based asset managers will be able to access another channel ‘to penetrate the large base of investable assets held by Chinese individuals’.
But the scheme still has to overcome a number of hurdles before it generates significant opportunities. For starters, it needs to finalise its operating model and account for investor perspectives and education.
‘The scheme can build on previous schemes such as Stock Connect and Bond Connect, and ensure that funds are safely ring-fenced, especially in the early days. Know your client, investor protection and appropriate capital controls will also be crucial to running a successful scheme,’ Kong says.
Overcoming these hurdles will require active engagement from all stakeholders to shape the scheme’s evolution, including understanding the different views and expectations of investors in the Greater Bay Area.
‘However, looking into the future when Wealth Management Connect gains a credible track record and is operating smoothly, eligible products could be expanded to include private funds and more complex products,’ Kong says. ‘Moreover, in the very distant future, insurance products and services such as annuity plans could also be offered, as some insurance companies increasingly offer and integrate wealth management solutions.’
Under the southbound Wealth Management Connect, mainland China residents would invest in products in Hong Kong and Macau, while the northbound Wealth Management Connect would flow in the opposite direction. Kong expects a greater volume of southbound investments.
‘The wealth story in mainland China is still unwritten, despite growing at an astonishing rate over the past decade,’ says Kong. ‘Mainland China’s mass affluence continues to grow at a robust pace, and the share of savings has increased with disposable household income over time in recent years.
‘Moreover, mainland China, known as a savings-rich economy, will need to ensure that capital is channelled effectively to financial products.
‘Lastly, Chinese investors are increasingly wanting to diversify in terms of geography and asset classes, and having access to a new suite of products through Wealth Management Connect can help with their evolving needs and goals.’
Chinese president Xi Jinping called in mid-October for ‘the integrated development of the mainland, Hong Kong and Macau’ in a speech marking the 40th anniversary of the establishment of the Shenzhen special economic zone.
‘While Xi’s speech hailed Shenzhen’s development over the past 40 years, it was encouraging to see his enthusiasm and support regarding the development of the Greater Bay Area,’ says Marie-Anne Kong, PwC’s Hong Kong asset and wealth management leader.
She thinks this bodes well for people living in the Greater Bay Area, which includes nine cities in the south of China along with Hong Kong and Macau. It also bodes well for the future of the new Wealth Management Connect scheme, the next step in the push for greater financial integration within the Greater Bay Area.
‘The Greater Bay Area’s rise will act as a springboard for growth opportunities in mainland China, and it is up to market participants involved with the Wealth Management Connect scheme to stay proactive and agile to position themselves for the compelling opportunities ahead,’ Kong says.