Wealth Management Connect: Waiting for the Floodgates to Open______

Leo Chen, Managing Director - Head of Asia, Calastone

For fund managers in Hong Kong, the opening of the Wealth Management Connect (WMC) – the first cross-border investment scheme connecting Hong Kong and Macau with the Greater Bay Area (GBA) – is the greatest opportunity in a generation. Potentially.

The latest move by the Chinese government to inch the doors of mainland financial markets open a little wider in the pursuit of greater economic integration is certainly well-targeted. The scheme creates a tantalising cross-border market of more than 70 million people for a wide range of financial products.

Initial terms for the WMC allow for RMB150 billion (US$23.2 billion) in investment product sales to flow in each direction, a combined southbound and northbound total of RMB300 billion. The 11 cities of the GBA include Shenzhen, Guangzhou and Hong Kong, which boast some of the densest concentrations of billionaires in the world. With the GBA seemingly on a fast-track to economic powerhouse status, that concentration is only likely to grow.

For fund managers and the expanding ranks of the wealthy within the GBA, the WMC offers the opportunity to widen their investment horizons and drive asset-management industry growth. According to the Hurun Wealth Report 2019, there are more than 450,000 high-net-worth families across Guangdong, Macau and Hong Kong, each with investable assets of more than RMB6 million. Collectively, these investable assets have been estimated at about RMB2.7 trillion, which would make the GBA the world’s wealthiest megalopolis.

For Hong Kong investors, the WMC will likewise offer an opportunity to diversify, and increase their RMB allocations. For the city as a financial entity, exclusive access to this vast pool of wealth will give it an edge over Singapore, and boost the territory’s status at a time when it is vigorously positioning itself as a leading global family-office hub.

Groundbreaking opportunity

“WMC is shaping up to be a groundbreaking initiative that will enable investors within the GBA to further diversify their portfolios through fresh cross-border opportunities, and Hong Kong/Macau investors to broaden their RMB allocations. Banks are bolstering their Greater China teams particularly their ability to select relevant managers and products. This brings great opportunities to Hong Kong based fintech companies that have significant expertise in delivering fund selection and bespoke asset allocation solutions to clients through a digital interface,” said Ariana Gao, Managing Director of Yunfeng Financial Group.

For Hong Kong fund managers, meanwhile, it’s a case of watch, wait and prepare – and hope that the distribution problems roadblocking other cross-border fund schemes can be overcome.

Ultimately, companies wanting to maximise the WMC opportunity will need back-office consistency, rather than dealing with a mix of different systems and operations.

Calastone is already the first global funds network to deliver direct Shenzhen Securities Communications Co. (SSCC) connectivity to Hong Kong financial institutions participating in the China-Hong Kong Mutual Recognition of Funds (MRF) cross-border programme, including fund managers, distributors, custodians and fund administrators.

This has enabled participating Hong Kong financial institutions to cut costs by accessing a wider set of order-processing channel options, and use their existing network connections to us to process fund orders to and from China.

This ability to reduce time, costs and complexity by eliminating different messaging and connectivity standards will be critical in the WMC, and we, at Calastone, are committed to supporting our clients with connectivity between banks and fund managers in the GBA scheme.

Cautious first steps

While the finer details of the WMC are still not set, in essence it allows residents of Hong Kong and Macau to buy mainland investment products sold by banks in the Greater Bay Area, and residents of nine Guangdong cities to buy investment products sold by banks in Hong Kong and Macau, as long as they are domiciled in those jurisdictions.

The potential is vast but, perhaps unsurprisingly, regulators have thus far been cautious in implementing the scheme. Northbound investors do not face any particular restrictions on the products they can buy from mainland banks, but only two categories of Chinese residents can participate, and they must additionally demonstrate a minimum of two years’ investment experience and a household net worth of RMB1 million.

Restrictions don’t end there. The WMC only covers products classified on the mainland as low and medium risk, meaning early investors will have access to a relatively vanilla mix of money market, bond, equity and index funds. Individual investors are also limited to RMB1 million of investment each, though Hong Kong-based banks have argued that unless that cap is raised, it will be more difficult to attract high-net-worth individuals.

Also, the RMB150 billion quota represents less than 10% of the gross savings within the GBA so, assuming the products on offer meet investor appetite, demand will probably far outstrip supply. A study by HSBC found that about 80% of the 1,600 GBA residents surveyed wanted to take part in the WMC, and were interested in Hong Kong investment products.

An unprecedented opportunity

Nevertheless, the potential opportunity to sell Hong Kong investment products to a market about 10 times the size of Hong Kong is so vast and unprecedented that fund managers are already taking preparatory steps.

“Value Partners is actively preparing to capture new business opportunities in the Greater Bay Area. GBA posts a huge opportunity to us, as the population of GBA is 10x of Hong Kong SAR, and total GDP is similar to the size of South Korea’s.

In particular, the Southbound Connect will allow individual residents of GBA, for the first time, to have direct access to wealth management products in Hong Kong SAR. In particular, the criteria for eligible products to be distributed via the Scheme will be funds that are registered and domiciled in Hong Kong SAR, which is a competitive advantage for Value Partners, as a locally headquartered asset manager, we have a diverse range of Hong Kong SAR-domiciled funds currently available to our investors.

We are in close discussion with our distribution partners who have branches in the mainland to get prepared for the highly anticipated launch. We reckon the launch of the WMC Scheme is just a beginning of the further opening up of China and capital market connectivity between Hong Kong SAR and the Mainland, and will continue to strengthen Hong Kong SAR’s role as an international financial centre,” said Steffanie Yuen, Managing Director, Value Partners.

Fund managers hoping to position themselves for this opportunity need to focus on making their products available for the GBA market. A recent KPMG survey found that the majority of Hong Kong-based funds expect AUM from the mainland to grow more than 10% over the next five years, while another study identified the GBA as one of the top three factors expected to affect the Hong Kong fund industry over the next five years. Despite this, more than 40% of funds haven’t formulated a strategic plan for the GBA.

Though details are not final, there are certain “known unknowns” fund managers can draw on to prepare a strategic plan. The scrapping in April of foreign ownership caps on fund management companies in Hong Kong was an encouraging sign that regulators are on a liberalisation trend. It’s widely expected, therefore, that the 50% cap on Hong Kong sales that applies to the MRF scheme may be relaxed, as will restrictions on the delegation of investment functions outside of Hong Kong to draw in a wider variety of products.

Ultimately, the WMC may consider opening the doors to funds domiciled outside of Hong Kong, with no 50/50 split, and fewer restrictions on size or type of fund. Doing so will help the scheme avoid some of the pitfalls of previous cross-border fund recognition schemes.

An end to fragmentation?

Fund distribution within Asia-Pacific has always suffered from fragmentation, but attempts to resolve the problem since the idea of “fund passports” was first floated a decade ago have met with mixed success, and few funds in the region have reaped many benefits from them.

The Asia Funds Passport has seen a steady increase in investment fund penetration rates, but UCITS captures many of these investments. The MRF itself has seen generally slow volumes since its launch in 2015, though these have also recently picked up. The ASEAN Collective Investment Scheme drawn up between Singapore, Malaysia and Thailand (and the Philippines, which joined this year) has so far failed to raise any significant cross-border assets.

The issue in almost every case is distribution, and through our direct connectivity with the SSCC in the burgeoning MRF programme, we have already taken significant steps to overcoming that obstacle.

The ongoing trend of China’s financial markets liberalisation highlights the importance of ensuring consistent and cost-efficient fund order processing. Our goal is to simplify domestic and cross-border distribution of funds between fund managers and distributors placing trades, regardless of geography and fund domicile. The WMC will, hopefully, provide another step forward towards that goal.

For fund managers aiming at success in the GBA, it’s about more than having access to market; it’s also about getting access in the most efficient way, using the best technology and processes that easily scale.

As the WMC rolls out, the early implementation of a compatible messaging and connectivity system will have enormous implications for participants, in terms of reining in costs and reducing time-to-market. We have demonstrated that we are already best placed to deliver that.

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