Caixin
Sep 11, 2021 07:49 AM
FINANCE

Five Things to Know About the New Cross-Border Wealth Connect Program

China set an initial quota of 150 billion yuan ($23.1 billion) for both the northbound and southbound links
China set an initial quota of 150 billion yuan ($23.1 billion) for both the northbound and southbound links

China kicked off a long-awaited cross-border wealth management connect (WMC) trial program in the Greater Bay Area (GBA), marking the latest effort by Beijing to further open up the mainland financial market.

Authorities in the mainland, Hong Kong and Macao jointly unveiled the final version of detailed regulations Friday for the cross-border WMC after a draft was released in May.

The regulations take effect Oct. 10, when mainland banks will be allowed to submit applications to sell cross-border wealth management products to branches of the People’s Bank of China (PBOC) in Guangzhou and Shenzhen, said Xing Yujing, president of the central bank’s Shenzhen branch. The products will then be reviewed by the PBOC, the China Securities Regulatory Commission and the China Banking and Insurance Regulatory Commission, Xing said.

The Hong Kong Monetary Authority, the city's de facto central bank, said local banks can commence the business after completing relevant preparation work.

The connect concept was announced in early 2019. The WMC allows mainland residents of the nine Guangdong cities in the GBA to invest in certain products sold by banks in Hong Kong and Macao via the “southbound link.” Residents of the two special administrative regions will also be able to invest in eligible products distributed by mainland banks in the area via the “northbound link.”

The program is another cross-border investment system between the mainland and Hong Kong following stock and bond connect programs.

The WMC “will further promote the interconnection of the financial markets between the mainland and Hong Kong and Macao and enhance the level of two-way opening up of China's financial market,” said Pan Gongsheng, deputy governor of the PBOC. “It will further inject new vitality into the development of the financial industry in Hong Kong and Macao and promote the construction and development of Hong Kong as an international financial center.”

Here are five key things to know about how the program will affect China’s financial system and what it brings to investors in the GBA.

How will the WMC operate?

According to the regulations, China set an initial quota of 150 billion yuan ($23.1 billion) for both the northbound and southbound links, while the cap on an individual’s investment would be set at 1 million yuan.

Mainland banks will need to build a cross-border partnership with banks in Hong Kong and Macao, and vice versa. Investors will open a remittance account in their home market. Under the banks’ partnerships, they will be able to remotely open an offshore bank account without traveling abroad. Investors will deposit principal in the remittance account, and then the money will be transferred to the offshore investment account for buying wealth-management products on the other side of the border.

Who are the target customers?

The program has some requirements regarding investors’ assets and investment experience. Qualified mainland investors should have at least two years of investing experience, according to the regulations. At the end of each of the preceding three months, they should have either outstanding household net financial assets worth at least 1 million yuan or outstanding household financial assets totaling at least 2 million yuan.

Experts said the target customers are middle-class people who are willing to diversify their investment portfolios. A survey of more than 2,000 investors in the Chinese mainland and Hong Kong found that a key attraction would be risk diversification, ahead of enhanced returns, according to a report Friday by the World Economic Forum. For example, some middle-aged investors may invest in foreign currency funds for their children’s overseas study to hedge foreign currency risk, said Li Hualun, a manager at HSBC Bank (China) Co. Ltd.

For Hong Kong investors, the connect program expands access to assets in rising mainland industries such as the internet, new infrastructure and health care in addition to well-performing yuan assets in the post-pandemic period, a spokesperson of Standard Chartered PLC told Caixin.

What products are included?

Eligible products for the southbound link are investments with low and medium risk, such as funds and bonds approved by Hong Kong's securities regulator, as well as yuan, Hong Kong dollar and foreign currency deposits, according to the regulations. For the northbound link, eligible investments would be wealth management products with low and medium risk as well, the regulations say.

Hong Kong operations of banks including HSBC Holdings PLC, Standard Chartered PLC, Citibank (China) Co. Ltd., Bank of China Ltd. and China Construction Bank Corp. previously told Caixin that they have plans to sell cross-border wealth management products. HSBC said it will first provide low- and medium-risk products including bonds, equity funds and money market funds. A spokesperson at Standard Chartered said it will initially offer savings, foreign exchange and fund products, including funds tracking multiple assets globally to cover global stock or bond markets.

Will it promote cross-border use of yuan?

Transactions in both the northbound and southbound links will be settled by the yuan via the Cross-Border Interbank Payment System (CIPS), China’s cross-border clearing and settlement system for yuan-denominated transactions.

To lower capital outflows risks, funds will be settled in a “closed loop” through one-to-one bundling of the remittance account and the investment account, meaning most of the funds that investors receive by selling investments will come from the money they paid earlier.

How does the WMC fit with other cross-border investment programs?

The WMC is the first program allowing retail investors to directly open and operate cross-border investment accounts, Au King-lun, executive director of the Financial Services Development Council, told Caixin in August. For instance, China’s stock and bond connect programs launched earlier target institutional clients.

Contact reporter Tang Ziyi (ziyitang@caixin.com) and editor Bob Simison (bobsimison@caixin.com)

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