Emerging Markets

Wealth Connect Scheme's Big Promise - Cerulli

Tom Burroughes, Group Editor, 22 September 2021

articleimage

The scheme is among a raft of cross-border moves taken by China to open up its capital markets over recent years. Ironically, it has coincided with worries in parts of the West about exposure to China because of Beijing's crackdown on certain sectors such as education and certain types of tech.

Mass-affluent investors are more likely to benefit from the cross-border freedoms promoted by structures such as the Greater Bay Area Wealth Connect programme, as many high net worth individuals already have overseas resources for offshore investing, a report says. 

As recently announced, the Guangdong-Hong Kong-Macau Greater Bay Area Wealth Management Connect (GBA WMC) has been launched, after being in the works for months. The scheme is designed to bind mainland China and nearby jurisdictions closer together. A number of banks such as DBS and HSBC have welcomed the move and are planning to launch products.

“While initial two-way capital flows could be small, fund managers who see long-term growth potential in the scheme should understand investors’ product preferences, deepen collaboration with both onshore and offshore distribution banks, and enhance their brands by building or leveraging on strong research and investment capabilities, in order to stand out from the competition,” Ye Kangting, senior analyst, Cerulli Associates, said. “The GBA WMC scheme is likely to be better received among qualified mass affluent and middle-class, instead of high net worth (HNW) investors, as many HNW individuals in Guangdong province already possess private banking accounts in Hong Kong, and some entrepreneurs have accumulated sufficient overseas assets for offshore investing."

The programme enables residents of Hong Kong and Macau to buy mainland investment products sold by banks in the Greater Bay Area, while allowing residents of nine Guangdong cities to buy those sold by banks in the two offshore centres. The development is similar to the Stock Exchange schemes arranged between Hong Kong and the mainland which were launched a few years ago in a bid to boost local equity markets. It also follows the Hong Kong/China Mutual Recognition scheme that came into force in 2015. The move comes at a time when Beijing has been liberalising its capital markets to encourage foreign investment inflows, a fact that has stoked controversy.

There are also parallels with other regions’ moves to integrate financial markets. For example, the European Union’s UCITS regime for funds enables investors to buy and sell funds across the EU without having to register them separately in each jurisdiction. In turn, the US benefits from a large, integrated funds and investments market.

With China liberalising access to its asset management industry, foreign players have significantly expanded their onshore footprints by setting up wholly foreign-owned fund management companies, Sino-foreign wealth management joint ventures, as well as wholly foreign-owned and JV insurance asset management companies. In addition, local regulators have been taking initiatives to launch various cross-border scheme plans, allowing offshore managers to tap the market’s investable assets, Cerulli Associates said in a report called Asset Management in China 2021: Seizing Opportunities Across Diverse Segments.

Besides the Connect scheme, other cross-border measures announced in 2021 and last year include the revamped Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) schemes, cross-listings of exchange-traded funds (ETFs) between mainland China’s stock exchanges and those in Japan, Hong Kong, and Korea, new Qualified Domestic Limited Partner (QDLP) pilot schemes in Hainan, Chongqing, Guangdong (excluding Shenzhen), and Jiangsu, as well as updated Qualified Foreign Limited Partner (QFLP) measures in Beijing and Shenzhen.

“In particular, the revamped QFII and RQFII schemes have the widest investment scope available to foreign institutional investors to access onshore investments; the inclusion of private investment funds could also benefit wholly foreign-owned enterprise (WFOE) private fund managers (PFMs) by possibly allowing parent companies to channel funds from offshore to help these PFMs raise assets for onshore private security fund launches,” Cerulli’s report said. 

BlackRock, the world's largest fund manager with more than $9 trillion of assets under management, has pushed into the onshore China funds market. However, George Soros, the influential hedge fund figure, recently described BlackRock’s push into the Chinese market as a “tragic mistake.”

The Hungarian-born financier, whose business is now run as a family office and no longer oversees outside money, said that BlackRock's dealings in the Chinese economy will not only lose money for its clients in the long run but will also inflict damage on the national security of the US and other democracies.

Beijing has pushed against a for-profit education system in the country and against other sectors, policies that have pushed up risks to holding assets in the world’s second-largest economy. China has shut down the circa $100 billion “edtech” sector, an intervention which followed cybersecurity investigations of the ride hailing app DiDi and other e-commerce companies, increased scrutiny of overseas IPOs and the imposition of fines and restrictions on some of China's largest e-commerce firms.

Register for WealthBriefingAsia today

Gain access to regular and exclusive research on the global wealth management sector along with the opportunity to attend industry events such as exclusive invites to Breakfast Briefings and Summits in the major wealth management centres and industry leading awards programmes