A program that allows banks in Hong Kong to sell offshore wealth management products in some of the wealthiest cities in southern China is set to become a new growth source of fee income and client base for lenders from the relatively small and mature market.
Major lenders in Hong Kong are gearing up for the so-called Wealth Management Connect program, which will allow them to sell mutual funds and other offshore investment products to qualified residents in nine mainland cities, in a pilot phase starting early June. Qualified residents must have net financial assets with a monthly balance of more than 1 million yuan, or financial assets exceeding 2 million yuan in the most recent three months.
HSBC Holdings PLC's units The Hongkong and Shanghai Banking Corp. Ltd. and Hang Seng Bank Ltd., Standard Chartered PLC's Standard Chartered Bank (Hong Kong) Ltd., as well as The Bank of East Asia Ltd. told S&P Global Market Intelligence they are hiring more wealth managers, beefing up their digital services or enhancing their back-end services such as data management and cybersecurity.
"Fundamentally, the growing wealth of Chinese investors is fueling a huge demand for wealth management products and services. Not to mention demand for diversification is strong due to lower risk-adjusted yields of onshore assets. Opportunities [for Hong Kong banks] have been largely bounded by the size of the local market which has long developed," said Nathan Chow, an economist and strategist at DBS. Chow expects the scheme to bring "double-digit growth" to these banks' wealth management businesses, without specifying a time frame.
Banks in Hong Kong have been offering wealth management services in mainland China via their onshore branches across the country, but have been mostly limited to providing locally approved financial products. The Wealth Management Connect program will add more offshore products and non-yuan assets to the offering, which bank executives and analysts expect will likely be met with strong appetite from mainland investors who look for more diversified portfolios.
"At the initial stage, considering the need for retail investors to familiarize with the cross-boundary investment products and environment, we have confined the scope to lower risk and relatively simple wealth management products at the launch," the Hong Kong Monetary Authority said in an email to Market Intelligence. It added that the program will exclude structured products mainly investing in derivatives such as futures and options.
Capturing growth
The nine mainland cities in the pilot program, including some of the largest and most affluent cities such as Shenzhen and Guangzhou, are part of the so-called Greater Bay Area, which is a strategic megapolis that aims to foster innovation and financial links among those cities, Hong Kong and Macau. The program also allows mainland Chinese banks to sell onshore wealth management products to investors in Hong Kong who meet certain asset thresholds, with a combined quota of 150 billion yuan. Beijing has already put in place two other connect programs that aim at providing mutual market access on stock and bond trading between Hong Kong and mainland China.
HSBC said on May 10 that it is on track to hire 1,000 staff for its wealth and personal banking business in Asia in 2021, which is part of its five-year plan, announced in February, to hire 5,000 people for the unit in the region. The company derived about HK$7.8 billion, or 15.5% of its total revenue in 2020 from selling wealth management investment products.
Standard Chartered revealed in April a plan to hire 400 staff members in its retail banking and wealth management unit in Hong Kong in 2021, after setting a goal in March to triple its income from the Greater Bay Area. Wealth management businesses accounted for about 13.3% of Standard Chartered's underlying operating income in 2020.
Bank of East Asia is also expanding its Greater Bay Area office in Hong Kong, which was created in January. "With the necessary infrastructure in place, we envision a steady increase in the Greater Bay Area's contribution to our wealth management business and becoming a key driver for our high net wealth segment," the company said.
Edna Wong, Hong Kong-based partner of risk consulting for KPMG, added: "This will certain give cross-border wealth management and digitization a big push. Banks need to have better planning in their digital strategy to ensure customer experience, manage regulatory risk and other risks arising from digital services, including but not limited to data and cybersecurity."
Strong appetite
"Many mainland China investors are under-served by the wealth management industry, particularly given their growing interest to diversify beyond [Chinese yuan] assets. The scheme is a significant breakthrough for the financial sector. It facilitates increased appetite to invest internationally [through] Hong Kong and, on the other hand, access [Chinese yuan] solutions in mainland China," said Daniel Chan, head of Greater Bay Area at HSBC.
Chan also added there are more than 450,000 high net worth households with more than 6 million yuan in investable assets across Guangdong province, Hong Kong and Macau, and fewer than 20% of retail investors in the Greater Bay Area own cross-border wealth products.
According to a July 2020 report by DBS, Guangdong province's GDP volume totaled $1.5 trillion in 2019, making it the fourth-largest sub-national economy in the world, after California, Texas, and New York. The nine cities in the Greater Bay Area accounted for 85% of Guangdong's economic output.
Hong Kong has HK$9.1 trillion of AUM for private wealth management business in 2019, according to a November 2020 report by consultancy KPMG. China's wealth management industry is estimated to be worth at least $17 trillion.
Hope for wider access
Wealth Management Connect was first announced in June 2020. Despite the small scale of the pilot phase, banks in Hong Kong see it as an indication of wider access to the mainland Chinese market in the future.
"The set-up sounds very similar to the Stock Connect [scheme]. As we observed in Stock Connect, the quota and limits and eligible products were gradually relaxed over time as usage increased," HSBC's senior foreign exchange strategist, Ju Wang, said in a May 7 report.
The Stock Connect program was first launched in November 2014 between the Shanghai and Hong Kong exchanges and extended in 2016 to include the Shenzhen market.
As of May 25, US$1 was equivalent to 6.41 Chinese yuan.