China's yuan continues its rise internationally and is closing the gap on the US dollar. Photo: Facebook

The long-awaited Wealth Management Connect (WMC) scheme, which will allow residents of the Hong Kong and Macau and people in nine cities in the Guangdong province to buy financial products in each other’s markets, was launched on Friday.

The WMC scheme lets residents of Hong Kong and Macau nvest in wealth management products distributed by mainland banks in the Greater Bay Area (GBA) and residents of mainland cities in the area invest in wealth management products distributed by Hong Kong and Macau’s local banks.

The scheme will initially lead to combined fund flows of 300 billion yuan (US$46.53 billion) in the GBA, which has an area of 56,000 square kilometers and a population of 72 million and is the largest and the wealthiest economic region in South China.

Analysts said there was a strong demand from mainland Chinese investors to diversify their portfolios by investing in Hong Kong’s financial products but the scheme might not be attractive to Hong Kong’s individual investors.

China has spent more than 15 years to gradually open its capital account in order to push forward its renminbi internationalization plan. In 2006, it launched the Qualified Domestic Institutional Investor (QDII) scheme, which allowed mainland financial institutions to invest in offshore markets such as securities and bonds.

The QDII was later expanded and modified to increase cross-border fund flows. In 2014, Shanghai-Hong Kong Stock Connect was launched, allowing mainland investors to trade H-shares and Hong Kong investors to trade A-shares.

In 2015, the Mutual Recognition of Funds (MRF) scheme was launched by the China Securities Regulatory Commission (CSRC) and Hong Kong Securities and Futures Commission (SFC). In 2017, a Bond Connect scheme was implemented but it only opened the northbound channel for Hong Kong investors to buy mainland bonds. The southbound Bond Connect link will be launched soon, Pan Gongsheng, deputy governor of the People’s Bank of China (PBoC) said Thursday.

On February 1, the PBoC announced the opening of a new office in Guangdong to steer a push into the GBA. The office will focus on loan business for small and medium-sized enterprises and support the bank’s wealth management business. On February 5, the PBoC, the Hong Kong Monetary Authority (HKMA) and the Monetary Authority of Macau signed a memorandum of understanding (MOU) over the WMC.

The People’s Bank of China headquarters. Photo: AFP

The PBoC said on May 6 that net cash flows in southbound and northbound directions under the WMC must not exceed 150 billion yuan each. Southbound Connect requires mainland investors to have over two years of investment experience, and financial assets of more than one million yuan.

On August 23, the PBoC held a seminar in Hong Kong to promote China’s plan to further internationalize its currency. Zhou Chengjun, head of the PBoC’s Financial Research Institute, said Hong Kong had the conditions and foundations to become a global renminbi asset management, value-added and risk management control center and the government had to boost its effort to achieve this goal.

On Friday, the PBoC, the HKMA and the Monetary Authority of Macau announced the implementation of the WMC. The HKMA said banks could start offering cross-boundary WMC services upon completion of the relevant preparatory work.

The WMC would not only offer more investment options for individual GBA investors but also create new opportunities for the banking and wealth management industry in Guangdong, Hong Kong and Macau, Eddie Yue, chief executive of the HKMA, said in a press conference in Hong Kong. It would also promote the cross-boundary circulation and use of the renminbi, further consolidating Hong Kong’s role as the global hub for offshore renminbi, Yue said.

As a safe harbor for funds, Hong Kong saw the total amount of its wealth management assets increased by more than 20% to nearly HK$35 trillion (US$4.5 trillion) last year from 2019 with 60% of the funds coming from the mainland, said Chief Executive Carrie Lam. It showed that global investors had confidence in Hong Kong.

Ma Xingrui, Governor of Guangdong, said in the same media briefing that the WMC would help Guangdong residents diversify their investment portfolios and Hong Kong and Macau investors benefit from the rapid economic growth in the GBA. Ma said the implementation of the scheme would accelerate the integration of the financial markets in Guangdong, Hong Kong and Macau.

“As of March 2021, mainland Chinese investors bought 15 billion yuan worth of Hong Kong funds under the MRF, six times more than the purchase by Hong Kong investors,” Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis, said in a research report in May. “We find asset allocation may be one of the key reasons explaining the differences. Funds in Mainland China tend to have a narrow focus on onshore equities while funds in Hong Kong are widely diversified.”

Strong demand from mainland Chinese investors to diversify their portfolios would probably be reflected in the capital flows of the WMC, she said. For Hong Kong investors, the attractiveness might not be as large unless mainland Chinese funds offered choices of what was unavailable in Hong Kong through the existing channels, she said.

Local media reports say any Hong Kong investment funds with more than 10% of its assets made up of crypto-currencies will now require a license from the Securities and Futures Commission. Photo: Unsplash
Hong Kong saw the total of its wealth management assets increased by more than 20% to nearly HK$35 trillion (US$4.5 trillion) last year over the 2019 figure. Photo: Unsplash

Initially, investors in Guangdong will be allowed to open their investment accounts in banks in Hong Kong and Macau without personally arriving in the two special administrative regions. However, investors in Hong Kong and Macau are required to open their accounts in Guangdong in person. It is expected that not many Hong Kong people would go to the mainland simply for the WMC in short term as they would have to be quarantined for 14 days.

The HKMA said it was discussing with the mainland regulators about the potential launch of a pilot scheme that would allow Hong Kong investors to remotely open mainland investment accounts.

“The launch of this new scheme will widen the scope of investment opportunities available to clients of the GBA, and is an important step toward realizing the potential of the area to become a leading global hub of wealth creation and management,” Amy Lo, chairman, executive committee of the Private Wealth Management Association (PWMA), said Friday. “We look forward to engaging with relevant authorities on how to expand the scheme’s scope in the future.”

“With the launch of the WMC, we see immense opportunities in expanding our business into China, anticipating a quarter of our HK Treasures Wealth customers will come from GBA in the next three years,” said Sebastian Paredes, chief executive of DBS Hong Kong. “We will work together with our esteemed local partners in China to leverage this significant opportunity for our customers, and to continue to contribute to the development and prosperity of GBA.”

Paredes said the WMC marked another important milestone for China’s capital account liberalization, and a significant effort in fostering a closer financial cooperation in GBA.

Read: Beijing urges HK to help globalize the yuan