(ATF) China recently launched a pilot scheme to spur cross-boundary wealth management in the Guangdong-Hong Kong-Macao Greater Bay Area. The scheme, dubbed Wealth Management Connect, will attract more capital to China’s higher-paying market and help the RMB/yuan to be strong again, say industry professionals say.
The new Connect program will be the fourth cross-border investment channel between Hong Kong and Mainland China, after the introduction of several stock and bond connections between 2014 and 2017.
Mirroring its predecessors, Wealth Management Connect consists of a “southbound” component that allows mainland inhabitants in the Greater Bay Area to invest in eligible financial products from banks in Hong Kong and Macau, as well as a “northbound” component for residents of Hong Kong and Macau to invest in the opposite direction.
Welcoming the announcement of the pilot scheme, Eddie Yue, Chief Executive of the HKMA, said Wealth Management Connect “marks another important milestone for the Mainland’s capital account liberalisation” and represents “a major breakthrough in Hong Kong’s offshore renminbi business development”. He also noted that the Wealth Management Connect will create a “much greater customer base and generous room for growth” for Hong Kong’s financial services industry.
Victor Wang, an analyst from the investment bank China International Capital Corporation (CICC), expects northbound traffic to be larger at the initiative’s initial launch compared with southbound as investors tap into the higher yields of wealth management products in mainland China.
“For example, the estimated annual yield of 6-month wealth management products offered by mainland Chinese commercial banks is about 3.80%, much higher than HIBOR (Hong Kong Interbank Offered Rate) for a 6-month period, which is 1.0%,” Wang said in a commentary report.
Statistics from Wind show northbound monthly transaction volumes significantly higher than southbound over the last two years for the Stock Connect scheme, a predecessor of Wealth Management Connect launched in 2014 for investors to buy stocks cross-boundary.
A survey by PwC with market players also revealed that customers in Singapore, Malaysia and some other Southeast Asia countries, especially those with Chinese descent, are keen to invest in mainland China’s financial products while the yields on wealth management products in some developed countries are negative right now.
In Wang’s view, the northbound traffic will increase the demand for offshore Renminbi, making it a more profitable and active currency.
Guo Jiayi, Chief Exchange Rate Analyst at CIB Research, shared a similar view that the Renminbi exchange rate will rebound with new types of investors joining the game and more channels open to Chinese investors to buy offshore financial products.
Financial regulators have revealed that investment funds under the Wealth Management Connect scheme will be managed through a closed-loop system, with one-to-one bundling of designated remittance and investment accounts, and can only be used to purchase eligible financial products.
Cross-boundary remittances will be carried out in RMB, and the currency conversion will be conducted in offshore markets.
CIB Research expects transactions under Wealth Management Connect to be able to circumvent the US$50,000 currency exchange limit, but be subject to aggregate and individual investor quotas.
Simple investment products
In respect of product scope of the WMC, the Hong Kong Monetary Authority said it will cover mainly simple investment products of relatively low risk, with room for expansion in the future.
Nathan Chow from DBS expects northbound investment products to include A-share mutual funds and low-to-medium RMB-denominated risk wealth management products, and southbound products to include low or medium-risk mutual funds as categorised by distributing banks, SFC-authorised bond mutual funds, exchange traded funds, and money market funds.
Chow expects the initiative to benefit the banks who distribute the products, as well as the wealth managers and insurers who produce them given the strong demand for diversification from Guangdong’s massive affluent and fast-growing middle-class population. The government’s multi-year deleveraging campaign has prohibited banks from guaranteeing investors against losses, resulting in lower risk-adjusted yields of onshore assets. This could provide structural opportunities for asset managers across the boundary, he said.
The official launch date of Wealth Management Connect is yet to be specified, but Eddie Yue said the implementation details will be finalised “in the coming months”.
With a population of over 70 million, the Greater Bay Area has a combined GDP of $1.6 trillion, greater than some of the G20 economies. The southern Guangdong province hosts 679,000 mainland households with investible assets of over 6 million yuan ($848,163), ranking second in China after Beijing, according to the 2019 Hurun Report.
Offshore financial assets only account for about 4.8% of mainland China residents’ total investible financial assets while the percentage is about 40% in Switzerland and the United Kingdom, according to CIB Research. Cross-boundary investment has great potential in China, it said.