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China-Hong Kong build wealth connect to bridge investments

China-Hong Kong build wealth connect to bridge investments
Hong Kong

China is further pursuing the opening of its financial markets. In its latest move to further open up in the Greater Bay Area and promote economic integration in the region, China has announced one of the most highly anticipated connectivity schemes, Wealth Management Connect.

After financial authorities in mainland China, Hong Kong, and Macao signed a memorandum of understanding for Wealth Management Connect in early February 2021, the scheme is in its final stages now. It will open the doors for both, Hong Kong and Macau residents to buy mainland investment products sold by financial institutions in the Greater Bay Area, and also vice versa.

Through this two-way wealth connect program, cross-boundary wealth management products will be sold through online platforms and mobile apps. It is the fourth cross-border investment channel between Hong Kong and mainland China since 2014.

China’s wealth expansion push

China was known for retaining strict capital controls to keep most of its vast household wealth and savings within its borders, restricting significant investment outflows. But the world’s second-biggest economy has been gradually opening up it financial markets in recent decades.  

Thus, linking the Greater Bay Area with its technology center Shenzhen and the manufacturing and transport clout of Guangzhou with the finance hub of Hong Kong could be beneficial for China.

The Wealth Management Connect can be appealing for China’s rich, as per experts. “Many mainland China investors are under-served by the wealth management industry,” Daniel Chan, head of Greater Bay Area at HSBC told S&P Market Intelligence.

He added that there are more than 450,000 high net worth households with more than $0.9 m in investable assets across Guangdong province, Hong Kong and Macau. However, fewer than 20% of retail investors in the Greater Bay Area own cross-border wealth products.

According to a recent Boston Consulting Group report, China will overtake the US as the country with the largest concentration of ultra-high net worth individuals by the end of the decade.

The Global Wealth Report of 2021 by the management consulting firm further added that if investable wealth in China keeps rising at the current rate of 13% per annum, the country will have around $10.4 tn in ‘ultra-assets’ by 2029, more than anywhere else in the world. 

For Hong Kong, the introduction of the wealth connect scheme could attract high-net-worth investors from mainland China. According to a survey conducted by HSBC and Nielsen, over 80% of mainland investors in the Greater Bay area plan to invest in Hong Kong through Wealth Management Connect.

“Fundamentally, the growing wealth of Chinese investors is fueling a huge demand for wealth management products and services. Not to mention demand for diversification is strong due to lower risk-adjusted yields of onshore assets. Opportunities for Hong Kong banks have been largely bounded by the size of the local market which has long developed,” Nathan Chow, Economist & Strategist at DBS said.

Banks prepare for wealth connect

Integrating the $1.7 tn Greater Bay area economy, the cross-border investment scheme between the financial hubs has caught the eye of international banks, who are planning to add more wealth managers in Asia to capture this growth. To join Wealth Management Connect, banks will need to have branches on both sides of the border, or partner with another bank.

The two-way investment scheme could yield almost $500m a year in fees for banks, according to Bloomberg Intelligence estimates. Standard Chartered, HSBC, Bank of East Asia and DBS are among lenders preparing to form partnerships with other banks to tap Greater Bay Area opportunities. Some of them have even ramped up hiring to have branches on both sides of the border to join the wealth link.

HSBC said it would spend $3.5bn over five years to develop its wealth and personal banking operations in Asia. Meanwhile, Standard Chartered is reportedly hiring or promoting 3,000 managers for its Asia wealth business over five years. Citibank has also laid out similar plans for the next five years to double wealth management staff numbers.

Major lenders in Hong Kong are also gearing up for the program to sell mutual funds and other offshore investment products to qualified residents in nine mainland cities. Amongst others, the Hongkong and Shanghai Banking Corp., Hang Seng Bank, as well as The Bank of East Asia told S&P Global Market Intelligence they are hiring more wealth managers.

As per Bloomberg Intelligence analyst Francis Chan, China’s four biggest banks including Industrial & Commercial Bank of China, along with HSBC and its Hong Kong unit Hang Seng Bank could benefit the most from Wealth Management Connect, given their extensive branch networks in the area.