I. Background
Cross-boundary Wealth Management Connect (“Wealth Management Connect”) will soon operate across the GBA.
The Hong Kong Monetary Authority (“HKMA”), the People’s Bank of China (“PBOC”) and the Monetary Authority of Macao have unveiled the framework (“Joint Framework”) in June 2020 for the Wealth Management Connect pilot scheme[1]. Later in February 2021, the PBOC, HKMA and other institutions signed a Memorandum of Understanding to clarify the scope of responsibility of relevant institutions regarding the supervision and cooperation of the GBA Wealth Management Connect. Recently in May 2021, the Guangzhou Branch of PBOC, Shenzhen Central Sub-branch of PBOC, China Banking and Insurance Regulatory Commission (“CBIRC”) and other Chinese regulatory institutions have issued the draft “Implementation Arrangements for the Cross-boundary Wealth Management Connect Pilot Scheme in the Guangdong-Hong Kong-Macao Greater Bay Area (Draft for Solicitation of Comments)” (“Implementation Rules”)[2].
The wealth management market has longed for the individual investor version of the qualified foreign institutional investor and the qualified domestic institutional investor schemes since 2015[3]. As mentioned in our Greater Bay Area publication issued in June 2020[4], the GBA Wealth Management Connect was initially proposed by the Central People’s Government of the People’s Republic of China in November2019[5], and then supported by a joint opinion issued by the PBOC, CBIRC, China Securities Regulatory Commission (“CSRC”) and State Administration of Foreign Exchange (“SAFE”) in May 2020[6]. 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 China Mainland and Hong Kong SAR.
This article synthesises important information about the Wealth Management Connect in the Joint Framework and the Implementation Rules.
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/.
Implementation Arrangements for the Cross-boundary Wealth Management Connect Pilot Scheme in the Guangdong-Hong Kong-Macao Greater Bay Area (Draft for Solicitation of Comments) (《关于< 粤港澳大湾区“跨境理财通”业务试点实施细则(征求意见稿)> 公开征求意见的通知》) (dated 6 May 2021), available at http://guangzhou.pbc.gov.cn/guangzhou/129142/129156/3833128/4243943/index.html (Chinese only).
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.
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.
Press release of the HKSAR Government entitled “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?fontSize=1.
Opinions on Financial Support for the Development of the Guangdong-Hong Kong-Macao Greater Bay Area jointly issued by the PBOC, CBIRC, CSRC and SAFE (“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).
The diagram below illustrates the southbound and the northbound investment flows contemplated under the Wealth Management Connect.
III. Key features
Key features of the Wealth Management Connect are highlighted below:
(I) Scope of eligible investors – residents in the GBA
Eligible individuals in China Mainland and Hong Kong SAR can personally (and not in joint names) make cross-boundary investments through the Wealth Management Connect.
Southbound route
Eligible Mainland investors must fulfil at least four requirements as illustrated below.
According to the Implementation Rules, eligible Mainland investors must meet the following requirements:
1) having full capacity for civil conduct;
2) having the household registration of the 9 Mainland cities in the GBA or having paid continuous social security or personal income tax in the 9 Mainland cities in the GBA for at least 5 years;
3) having more than 2 years of investment experience and having a household financial net asset end-of-month balance of not less than Renminbi 1 million in the last 3 months, or having a household financial asset end-of-month balance of not less than Renminbi 2 million in the last three months; and
4) using their own funds to purchase investment products.
Northbound route
Eligible Hong Kong investors must meet the relevant requirements set by the Hong Kong financial regulators. At present, the Hong Kong financial regulators have not yet announced the relevant rules. We expect that all Hong Kong resident identity card holders will be eligible Hong Kong investors.
(II) Eligible investment products – simple and low risk products
Southbound route
The scope of the investment products in the southbound route is regulated by the Hong Kong financial regulators. At present, the Hong Kong financial regulators have not yet announced the relevant rules. We expect that during the initial stage of the Wealth Management Connect, low-risk wealth management products with a simple structure (such as mutual funds) are more likely to be included as eligible investment products under the southbound route, whereas high-risk products with a complex structure may only be included for trading at a later stage.
Northbound route
According to the Implementation Rules, the scope of investment products under the northbound route (i.e. onshore Chinese wealth management investment products available for Hong Kong residents to invest) include:
1) Non-guaranteed net worth wealth management products (except cash management financial products) issued by Mainland Chinese financial companies (including wealth management subsidiaries of banks and joint venture wealth management companies controlled by foreign companies), and assessed by the issuer and the Mainland agency bank[7] to be of “level 1” to “level 3” risk;
2) Publicly offered securities investment funds assessed by the Mainland public fund manager and the Mainland agency bank with a risk rating of “R1” to “R3”.
(III) Account opening and bundling – one-to-one bundling of the remittance and investment accounts
Investors must open a new local account or use an existing local account as the dedicated remittance account. After a local commercial bank has reviewed the requisite application documents, investors may open a dedicated investment account with a designated bank in Hong Kong SAR or China Mainland (as the case may be). As illustrated below, the dedicated investment account should be bundled with the dedicated remittance account with a bank in Hong Kong SAR or China Mainland (as the case may be).
Mainland agency banks” refer to the Mainland banking financial institutions in the GBA that sell investment products under the northbound route as agents.
(IV) Closed-loop mechanism of cross-boundary funds flow
The Joint Framework and the Implementation Rules provide that the cross-boundary flow of funds between China Mainland and Hong Kong SAR will be implemented through the one-to-one bundling of the dedicated investment account and the dedicated remittance account subject to closed-loop mechanism and quota management.
According to the Implementation Rules, all cross-boundary remittances of the Wealth Management Connect should be conducted in Renminbi, and any FX/CNY currency conversion must be conducted in the offshore market. The following diagram shows the closed-loop mechanism of cross-boundary funds flow through the Renminbi Cross-border Interbank Payment System (“CIPS”).
We summarise the relevant Implementation Rules as follows:
1) Investors may use Renminbi for cross-boundary remittances subject to the aggregate and individual investor quotas prescribed by the regulators from time to time;
2) Funds deposited in the dedicated investment account can only be used to purchase eligible investment products. If the wealth management product is denominated in Hong Kong dollar or other foreign currencies, Renminbi will be converted into an appropriate currency in the offshore market;
3) Investors cannot withdraw money from the dedicated investment account; and
4) Realised investment proceeds will be converted into Renminbi and remitted through the CIPS for cross-boundary remittance.
Currently, the relevant Hong Kong financial regulators have not yet announced the relevant cross-boundary remittance rules. We expect that the rules of the Hong Kong financial regulators will be consistent with the Implementation Rules.
(V) Quota restriction
The cross-boundary fund flows under the northbound and southbound Wealth Management Connect are subject to aggregate and individual investor quotas prescribed by the regulators from time to time. In accordance with Articles 41 and 46 of the Implementation Rules, the current aggregate and individual investor quota are tentatively set at 150 billion yuan and 1 million yuan respectively.
Conclusion
The fund industry has anticipated that the number of HK fund customers will increase 10-fold due to the Wealth Management Connect. The Wealth Management Connect will foster financial integration and create greater connectivity between Hong Kong SAR and China 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:
“[the] WMC will create a much greater customer base and generous room for growth for Hong Kong’s financial services industry. …. it will drive the development of the entire financial services value chain, encompassing product development, distribution, asset management and related professional and support services, …. expand the catchment area of our wealth management industry, providing greater incentives for global financial institutions to set up and expand their presence in Hong Kong to serve Mainland investors.”