China/HK: GBA Wealth Connect is coming

The PBoC and its Hong Kong and Macau counterparts have recently announced plans to establish a cross-boundary Wealth Management Connect pilot scheme in the Greater Bay Area.
Nathan Chow09 Jul 2020
  • Wealth Management Connect is the 4th cross-border investment channel…
  • … between Hong Kong and mainland China since 2014
  • Wealth managers stand to benefit given Guangdong’s massive affluent population
  • At the initial stage, the scheme will cover mainly investment products with relatively low risk
  • The channel enables closed-loop RMB funds flow across the border to contain financial risks
Photo credit: AFP Photo

The People’s Bank of China and its Hong Kong and Macau counterparts have recently announced plans to establish a cross-boundary Wealth Management Connect pilot scheme in the Guangdong-Hong Kong-Macau Greater Bay Area (GBA) and unveiled some frameworks of the scheme. The official launch date and implementation details will be available in the coming months.

This is another step towards opening China's capital markets. Wealth Management Connect is an arrangement where residents can carry out cross-boundary investment in wealth management products distributed by financial institutions in the GBA.

The Wealth Management Connect, like its predecessors, consists of a southbound and a northbound component. Under the Southbound Connect, the inhabitants of the Guangdong cities can tap financial products sold by the banks in Hong Kong and Macau. Under the Northbound Connect, residents of Hong Kong and Macau can invest in eligible wealth management products distributed by Chinese banks in the Bay Area.

Wealth managers and insurance companies stand to benefit. Aside from Hong Kong and Macau, the nine cities in the GBA account for 85% of Guangdong’s economic output. Guangdong leads the country in provincial GDP volume (USD1.5tn) and is currently the 4th largest sub-national economy in the world. Its per capita disposable income has surged 130% over the past decade. Guangdong, following Beijing, ranks second in terms of household  wealth accumulation. According to the 2019   Hurun Report, the province was host to 285,000 high-net-worth households (>RMB10mn in asset) as well as 679,000 “affluent households” (>RMB6mn). The growing wealth is fueling huge demand for wealth management products and services. And the rapidly expanding middle class is prodigious at saving. The meagre social safety net makes it imperative to stash money for retirement, education, and healthcare.

Meanwhile, demand for diversification is strong due to lower risk-adjusted yields of onshore assets. Government’s multi-year deleveraging campaign has prohibited banks from guaranteeing investors against losses. For instance, the recent surge in government bond yields has driven the net asset value on more than 280 low-risk, bond-linked WMPs (3% of the market) below the initial RMB1 value. That left many retail investors with accounts flashing red for the first time. The selloff is also spilling over into the credit market where yields on corporate debt rose to the highest in five months.

WMPs that have their NAVs disclosed onshore reached RMB12.5tn in 1Q, more than half of the total. Conditioning investors to face losses could provide structural opportunities for asset managers across the boundary. Specifically, the initiative will benefit the banks who distribute the products, as well as the wealth managers and insurers who produce them. After peaking at HKD72.68bn in 2016 (or 39% of all premium collected), insurance policies sold to mainland customers declined to HKD43.4bn in 2019 as regulators tightened currency outflow rules to staunch capital flight.

Ensuring closed-loop capital flow. Drawing on prior experiences, the Northbound and Southbound Connects will be conducted and managed in a closed-loop system. The key to understanding this is to recall that China’s capital account is yet fully liberalized. Foreign investors are only allowed to move money into (and out of) the country for specific, approved purposes. Through the bundling of designated remittance and investment accounts, the relevant funds will only be used to invest in   eligible investment products. Cross-boundary remittances will be carried out in RMB, with currency conversion conducted in the offshore markets.

For instance, after opening a designated account with a Hong Kong bank, mainland investors can transfer RMB to purchase a range of financial products in Hong Kong including stocks, bonds, and paper gold. Following the completion of investment, conversion and remittance can only be made in RMB, and domestic funds can only be withdrawn domestically. Meanwhile, investors wishing to buy Chinese wealth management products must purchase RMB in Hong Kong (technically they purchase offshore RMB, or “CNH”), not on the mainland. Hence the Connect forms a “closed loop”, segregating RMB used to buy Chinese investment products outside of the GBA.

Simple and low-risk products. Southbound products should be simple and transparent products in the early stage, in our view. These include low or medium risk mutual funds as categorized by distributing banks, and SFC-   authorized bond mutual funds, exchange traded funds, and money market funds. In respect of investor suitability, reference can be made to the Stock Connect Schemes. Initially, mainland investors would need to have assets of at least RMB500k in order to qualify for the initiative. That could effectively reduce the risk of incurring early and heavy losses even without ‘implicit guarantees’ by the regulators. Over time, investable products can be expanded to hybrid mutual funds, private funds and others. As for northbound investment, the first included products could range from A-share mutual funds to low-to-medium risk RMB-denominated wealth management products.

To be certain, the establishment of a two-way Wealth Management Connect scheme is just a small frame of the whole picture of making the GBA an area with a high degree of connectivity. Further announcements are expected in a bid to foster closer ties in financial services between the eleven cities. These include enhancing the cross-boundary payment and settlement system (i.e. GBA FPS) and standardizing mortgage registration by Hong Kong financial institutions across the GBA.

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Nathan Chow



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