China’s Wealth Management Connect, an investment initiative linking mainland China and Hong Kong that many see as a liberalization of China’s strict capital rules, saw a surge in inflows into high-interest deposits earlier this year. caused it. These influxes from China come after regulators expanded the range of products they could offer after years of overwhelming lack of support for the Connect initiative.
But the program is starting to lose momentum again as the U.S. Federal Reserve embarks on a rate-cutting cycle, prompting market participants to seek further loosening of rules to make it more attractive.
Launched as a pilot scheme in 2021, Wealth Management Connect allows residents of Hong Kong, Macau and nine cities in southern Guangdong province, with a population of over 86 million people, to directly invest in wealth management products across borders. .
This is an addition to the existing system linking Hong Kong and mainland bond and equity markets, and is aimed at helping a large number of mainland Chinese investors build more global asset exposure. Mainland investors are typically subject to strict quota regulations governing the movement of funds into and out of the country.
In the first few years, response to the scheme was slow, banks and industry officials said. To that end, regulators in February rolled out an enhanced version called Wealth Management Connect 2.0, increasing quotas for retail investors from RMB 1 million ($142,000) to RMB 3 million ($427,000). and expanded its offering to mutual funds and deposits.
It had a noticeable effect. Southward capital flows, or the inflow of mainland Chinese investors into the system, reached more than 68 billion yuan ($9.7 billion) between March and July this year, according to official data. , which is more than 4.5 times the total southward capital flows since its inception. The 2021 scheme will be implemented by the end of February this year.
These enhancements to Wealth Management Connect also significantly increased the proportion of southbound flow limits (always 150 billion yuan) actually used by investors, increasing from less than 2% to approximately 10% after the changes. However, interest in northern investment, where Hong Kong and overseas investors can buy mainland goods, remained muted.
Bank of China (Hong Kong), the region’s scheme leader, currently makes more than 350 financial products available through its Southbound scheme, and says customer numbers have surged by more than 50 per cent in the first half of this year.
Joyce Leong, assistant general manager of the bank’s personal digital banking products division, believes the enhanced measures are having a positive impact. The bank found that the proportion of fund transactions over RMB 1 million through southbound schemes has increased.
China Asset Management, one of China’s leading investment trust companies, says investors are showing strong interest in a wide range of products, from multi-currency money market funds to bond funds, equity funds and exchange-traded funds.
However, while China initially aimed to develop cross-border investment channels, market participants have highlighted the limits to the growth of the Wealth Management Connect scheme, including its overreliance on foreign currency deposits.
“There are two takeaways from this,” explains Ajay Mathur, head of consumer banking group and wealth management at DBS Bank Hong Kong. “Firstly, it is clearly driven by interest rate arbitrage and secondly, there is a lack of active investment advice.”
Mathur warns that reliance on such arbitrage opportunities is unsustainable as they only last for a short period of time. “Right now, (interest) rates are lower and the Fed’s rates are changing as well. . . . Arbitrage may be lower,” he says.
However, a decline in interest rate arbitrage may lead investors to choose other solutions. For example, they may seek fixed income or multi-asset products after their current term deposits mature, suggests Freeman Tsang, head of intermediation in Asia ex-Japan at Pictet Asset Management.
“In the short term, there won’t be a lot of flows back into (interest rate arbitrage),” he says. “But what we are seeing is that if interest rates continue to fall to a certain level, people will start looking to diversify into other investments to achieve the expected returns.” But it will take time for that to become a reality, Tsang added.
However, restrictions on how banks can sell products through their branches continue to draw criticism as they limit their ability to aggressively market and provide proactive investment advice to mainland Chinese customers.
Standard Chartered, one of the participating banks in the Wealth Management Connect scheme, said that while many of its customers in the Greater Bay Area are interested in the products on offer, many are not interested in overseas investment funds. Although enthusiastic, a significant number said they lacked knowledge of overseas markets. .
“Constructing a typical investment portfolio requires a two-way conversation,” Mathur emphasizes. “Current restrictions prevent banks from actively interacting, so most of the money ends up in deposits.”
Nevertheless, there is optimism about the program’s future. Further inflow increases may be driven by future distributor expansion. A distributor is a group of at least five to six Chinese securities firms based in Hong Kong that have a broader customer profile and are better able to identify suitable customers for investment products. *, according to Tsang.
“We hope to continue expanding into big cities like Shanghai and Beijing,” he says. “We always want to take advantage of big cities, and there’s certainly demand from them. That being said, there’s still a lot of work to be done.”
The authorities are considering further easing in order to realize Wealth Connect 3.0. A Hong Kong government spokesperson said local officials and regulators have been in close contact with the industry and Chinese regulators about WealthLink’s implementation.
“We will continue to work with the industry to strengthen investor education in the Greater Bay Area,” the spokesperson added. . . “To increase investor knowledge,” he said, and will consider further enhancements to increase investor choice.
Industry leaders agree. Speaking at a Bloomberg event in June, senior executives from UBS and HSBC called for deeper ties between Hong Kong and mainland China to meet the evolving needs of private banking customers.
Mathur warns that China’s macroeconomic slowdown could lead to more “people considering taking their money out.” . . (in terms of) how regulators perceive Wealth Connect.”
But importantly, the Wealth Management Connect scheme operates as a so-called “closed-loop” system, meaning investors cannot ultimately move their cash from China to another country. .
“Even if money flows into Hong Kong, the pipes in Hong Kong don’t open and the money can’t suddenly flow to Japan, the US, Switzerland, or into different products,” Mathur said. “From a capital management perspective, there is much less risk of funds leaving the country.”
“Be open about it. It’s not a matter of ‘if,’ it’s a matter of ‘when,'” he says. “With each step of enhancement, we see the sales process for the product suite open up. . . . Marketing rules and marketing processes, these are playing a[big]role.”
