China’s ambitious plans to create a ‘wealth management connect’ system across the greater bay area could benefit Hong Kong fund managers tremendously, writes Cititrust chairman Stewart Aldcroft.
The opening up of the Greater Bay Area (GBA) in China for financial services products has the potential to offer one of the greatest opportunities available for both local and global fund managers in Hong Kong.
China has declared an intent to create ‘Wealth Management Connect’ across the GBA, which will eventually allow a wide range of financial services products cross-border access to more than 70 million people. Wealth Management Connect (WMC) will enable use of eligible mutual funds, bank deposits, insurance products, securities and potentially pensions from Hong Kong to be sold anywhere in the GBA.
For fund managers, the opportunity to sell their Hong Kong products to an economically wealthy area around ten times the size of Hong Kong is unprecedented.
What is the GBA?
In 2017, China’s president, Xi Jinping, announced the formation of a new economic region in southern China to be called the Greater Bay Area. The GBA encompasses an area including Hong Kong, Shenzhen, Macau, Guangdong and seven other Chinese cities, that has a population of over 70 million i.e. twice the size of California, bigger than France or the UK, with a total GDP of around the same as California. The objective of the development is ultimately to provide borderless, seamless access to a wide range of goods, services, and other economic activities, especially manufacturing, technology, design and financial services. Each major city in the GBA would become the centre for certain types of activities, thus Shenzhen may become the technology hub, Guangdong the manufacturing hub and Hong Kong the financial hub.
In May 2020, an announcement from the People’s Bank of China (PBoC), together with the other key regulators for the banking, insurance and securities industries, has lit the blue touchpaper to one of the most exciting opportunities in financial services anywhere in the world. WMC will allow cross-border sale of financial products within the GBA. On 29 June, the Hong Kong Monetary Authority and the Monetary Authority of Macao joined with the PBoC to confirm the WMC pilot scheme in the GBA. In August, the PBoC and other Chinese regulators issued further guidance on what can be expected.
What has been proposed?
The GBA outline development plan was issued in February 2019 to more formally establish the GBA. The GBA (Circular 2020-95) was issued on May 14, 2020 by the PBoC together with the CSRC, CBIRC and SAFE, to announce 26 clauses or “opinions” for consideration, to in effect create a Wealth Management Connect system across the GBA that follows similar access routes to the well-established Stock and Bond Connect and Mutual Recognition of Funds (MRF) routes between Hong Kong and China.
WMC is intended to be run in parallel with other established cross-border access routes. It will allow development of financial products for an array of wealth management products, including bank deposits, mutual funds, exchange-traded funds (ETFs), securities, private equity and credit products, medical, accident and vehicle insurance products and life insurance products.
At this stage, a final definition of what constitutes wealth management products is awaited and thus what may be eligible for inclusion. It can be assumed they will be all those that most people in the industry are familiar with and that have been widely available in Hong Kong for many years. Of course, it should not be forgotten that in making them available, it is intended this should be across the GBA, thus many similar products in China will become available in Hong Kong for the first time too. This potentially could lead to price competition, which may be no bad thing for consumers across the region.
Where should fund managers focus?
The focus for fund managers undoubtedly should be on having their unit trust and mutual fund products available to be sold across the GBA. It is being made clear by the regulators on both sides of the border that only locally domiciled products can and will be eligible for inclusion. Further, rather than rely on the MRF, there is a desire to achieve an independent criteria for what funds will be allowed. These will be funds that have a low-to-medium risk rating, don’t use leverage, derivatives or other enhancements, and will likely be ‘plain vanilla’ in their investment objectives.
For global fund managers, unless they have already established Hong Kong-domiciled funds, they will not be able to participate in the GBA Wealth Management Connect programme, as Ucits products from Luxembourg or Dublin are excluded. In aiming for an entirely different set of criteria from those applicable for MRF, funds can avoid some of the previous sticking points under MRF of the 50/50 split of investors, minimum age and size of fund. But a big advantage may be that it could allow greater sub-advisory opportunities or feeder or fund-of-fund products to be included, both of which can enlarge the scope of products available.
Closed loop system, restrictions
Inevitably, as has occurred with all the other China access schemes, WMC within the GBA will face some restrictions. While most of these have not yet been confirmed, it is expected there may be quotas for the aggregate value of investment assets allowed to flow across borders. There may well be minimum thresholds set for individual investors, clearly aiming to provide these services to the higher new worth target group, but also a maximum amount per person that can be invested.
It is also expected that for mainland investors buying Hong Kong financial products, there will be a ‘closed capital circulation management’ policy adopted. This ‘closed loop’ in effect will mean that an investor in China may only buy through their bank in China and only be allowed to get their money back through the same bank in China. There will not be product fungibility, thus you can’t buy in Shenzhen and get money back in Hong Kong, for example. This has been the well-established route for MRF, using ChinaClear, thus most fund managers already on the MRF system will be familiar with the circumstances.
Who will do distribution?
Banks will be given priority for distribution. This may be due to them being the best-established route across China already, and thus a familiar place for end-investors to go for advice. Banks on each side of the GBA are expected to work with each other to provide the facilities.
The potential of WMC in the GBA is unlimited. In 2020 already, China’s retail investors have poured more than RMB1 trillion (US$141 billion) into the launch of over 640 new funds in 2020 year to date, demonstrating their need to find more attractive investment propositions. But it is also clear many global fund managers in Hong Kong are at this stage unprepared and not able to participate, often because they have not established any locally domiciled funds that could be included. This is a shame, as quite clearly any scheme that provides more opportunities must be considered attractive.
Stewart Aldcroft is chairman of Cititrust Limited, and senior adviser for Citi’s Markets and Securities Services, based in Hong Kong
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