Greater Bay Area Series – Framework for the Wealth Management Connect announced

This article was written by Minny Siu, Richard Mazzochi, Cindy Shek and Agnes Chan.

Background

Wealth Management Connect ("Wealth Management Connect") will soon operate across the Guangdong-Hong Kong-Macao Greater Bay Area ("GBA").

The Hong Kong Monetary Authority ("HKMA"), the People's Bank of China ("PBOC") and the Monetary Authority of Macao have just unveiled the framework ("Joint Framework") for the cross-boundary wealth management connect pilot scheme[1]. The wealth management market has anticipated the individual investor version of the qualified foreign institutional investor and the qualified domestic institutional investor schemes since 2015[2].

Our Greater Bay Area publication issued in June 2020[3] explained the Wealth Management Connect for the GBA was initially proposed by the Central Government of the People's Republic of China in November 2019[4], and then supported by a joint opinion issued by the PBOC, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission and the State Administration of Foreign Exchange in May 2020[5].

Following the successful launch of the Stock Connect in 2014 and the Bond Connect in 2017, the Wealth Management Connect is the latest access channel to the suite of Connect schemes linking the capital markets in the Mainland and Hong Kong*.

Wealth Management Connect – Southbound and Northbound

According to the Joint Framework[6], the Wealth Management Connect is defined as follows:

The diagram below illustrates the Southbound and the Northbound investment flows contemplated under the Wealth Management Connect.

Key features

While implementation details about the Wealth Management Connect are not yet announced (including investor eligibility, scope of eligible investment products, mode of investment, investor protection and how disputes are resolved), the regulators are expected to adopt an incremental approach so that they can monitor any risks for investors in the roll out of the scheme.

Key features of the Wealth Management Connect are highlighted below:

Scope of eligible investors – residents in the GBA

We anticipate that eligible investors should fulfil at least four requirements (as illustrated below).

We anticipate an eligible investor:

1. is an individual resident in a city in the Greater Bay Area for a minimum period;
2. holds a minimum threshold of financial assets;
3. opens and maintains a designated investment account in Hong Kong or the Mainland (as the case may be) ("Designated Investment Account") to invest in eligible investment products. Funds can only be deposited into the Designated Investment Account from or transferred out to a domestic bank account in the Mainland or Hong Kong (as the case may be) ("Designated Remittance Account"); and
4. (for Southbound investors) continue to be subject to the aggregate and individual investor quota of foreign exchange remittance (currently at USD 50,000 per year) with respect to any cross-boundary remittance of funds.

Eligible investment products – simple and lower risk products

During the initial phase of the Wealth Management Connect, wealth management products with a lower level of risk and less complex structure (such as mutual funds) are likely to be introduced. Products with higher level of risk or more complex structure may be permitted at a later stage.

Account opening and bundling – one-to-one bundling of the remittance and investment accounts

After a local commercial bank has reviewed the requisite application documents, an investor may open a Designated Investment Account with a designated bank in Hong Kong or the Mainland (as the case may be). The Designated Investment Account should be bundled with a Designated Remittance Account with a bank in Hong Kong or the Mainland (as the case may be), as illustrated below.

Closed-loop system of cross-boundary funds flow

The Joint Framework provides that the cross-boundary flow of funds between the Mainland, Hong Kong and Macao will be conducted in a closed-loop, implemented through the one-to-one bundling of a Designated Investment Account and a Designated Remittance Account.

Under the Southbound Wealth Management Connect account, any FX/CNY currency conversion must be conducted in an offshore market[7]. We anticipate that:

1. CNY will be remitted from the Designated Remittance Account in the Mainland and credited to the Designated Investment Account in Hong Kong, subject to the aggregate and individual quota prescribed by the regulators from time to time;
2. funds deposited into the Designated Investment Account in Hong Kong can only be utilised to purchase eligible investment products. CNY will be converted into the appropriate currency in which the wealth management product is denominated (be it HKD or other foreign currency);
3. withdrawal from the Designated Investment Account in Hong Kong is unlikely to be permitted; and
4. realised investment proceeds will be converted to CNY and remitted back to the Designated Remittance Account in the Mainland.

The diagram below illustrates the closed-loop system of cross-boundary funds flow for the Southbound Wealth Management Connect.

Similar to the Northbound Bond Connect, and considering the closed-loop concept as contemplated in the Joint Framework, we anticipate that:

1. all investment funds must be remitted through designated custodian/ distributing bank accounts for remittance into and out of the Mainland; and
2. any onshore Renminbi proceeds will be converted into FX (unless the original investment fund for the investment was offshore Renminbi (CNH)) for a Northbound investor to repatriate the proceeds out of the Mainland to the Designated Remittance Account.

Quota limits

The cross-boundary fund flows under the Northbound and Southbound Wealth Management Connect will be subject to aggregate and individual investor quotas prescribed by the regulators from time to time.

Conclusion

The fund industry has anticipated that the number of HK fund customers will increase 10-fold due to the Wealth Management Connect[8]. The Wealth Management Connect will foster financial integration and create greater connectivity between Hong Kong and the Mainland. It will "further consolidate Hong Kong's role as an international financial centre and the world's offshore renminbi business hub". Eddie Yue, the Chief Executive of the HKMA, pointed out that[9]:

KWM has a wealth of experience advising clients on GBA initiatives and innovative cross-border access programmes such as the Stock Connect, the Bond Connect and the Wealth Management Connect. If you are looking for professional advice about the Wealth Management Connect, please feel free to contact us.

We anticipate the increasing connectivity and rapid development of the GBA and will continue to bring you all the latest thinking on all things GBA. We are housing all our relevant client alerts on our GBA Hub to make it easier for clients to view when convenient.

Read our article on the new plans to support the GBA

Read our article on the GBA's latest aviation developments

[1] HKMA, "Joint Announcement of the People's Bank of China, the Hong Kong Monetary Authority, and the Monetary Authority of Macao on the Launch of the Cross-boundary Wealth Management Connect Pilot Scheme in the Guangdong-Hong Kong-Macao Greater Bay Area" (dated 29 June 2020), available at https://www.hkma.gov.hk/eng/news-and-media/press-releases/2020/06/20200629-4/

[2] For more details, please refer to our publication entitled "KWM Connect - China Stock Connect and Mutual Recognition of Funds" (June 2015), available at https://www.kwm.com/en/hk/knowledge/downloads/kwm-connect-crossborder-investment-hk-china-20150630

[3] King & Wood Mallesons, "Something for everyone: New plans to support the development of the Greater Bay Area unveiled" (dated 8 June 2020), available at https://www.kwm.com/en/hk/knowledge/downloads/new-plans-to-support-gba-unveiled-20200608

[4] Government of the HKSAR, press releases "CE attends meeting of Leading Group for Development of Guangdong-Hong Kong-Macao Greater Bay Area (with photos/videos)" (dated 6 November 2019), available at https://www.info.gov.hk/gia/general/201911/06/P2019110600764.htm

[5] "中国人民银行 中国银行保险监督管理委员会 中国证券监督管理委员会 国家外汇管理局关于金融支持粤港澳大湾区建设的意见" (dated 14 May 2020), available at http://www.pbc.gov.cn/goutongjiaoliu/113456/113469/4023428/index.html (Chinese only)

[6] HKMA, "Joint Announcement of the People's Bank of China, the Hong Kong Monetary Authority, and the Monetary Authority of Macao on the Launch of the Cross-boundary Wealth Management Connect Pilot Scheme in the Guangdong-Hong Kong-Macao Greater Bay Area" (dated 29 June 2020), available at https://www.hkma.gov.hk/eng/news-and-media/press-releases/2020/06/20200629-4/ (paragraph 1)

[7] HKMA, "Joint Announcement of the People's Bank of China, the Hong Kong Monetary Authority, and the Monetary Authority of Macao on the Launch of the Cross-boundary Wealth Management Connect Pilot Scheme in the Guangdong-Hong Kong-Macao Greater Bay Area" (dated 29 June 2020), available at https://www.hkma.gov.hk/eng/news-and-media/press-releases/2020/06/20200629-4/ (paragraph 3)

[8] South China Morning Post, "Hong Kong wealth managers can't wait for new Connect programme, with Singapore ready to pounce on city's troubles" (dated 22 June 2020), available at https://www.scmp.com/business/banking-finance/article/3089974/hong-kong-wealth-managers-cant-wait-new-connect-programme

[9] HKMA, inSight "Wealth Management Connect Scheme in the Greater Bay Area" (dated 29 June 2020), available at https://www.hkma.gov.hk/eng/news-and-media/insight/2020/06/20200629/

*Any reference to "Hong Kong" or "Hong Kong SAR" shall be construed as a reference to "Hong Kong Special Administrative Region of the People's Republic of China".