The GBA plays an increasingly significant role in the overall development of China. What were separate cities competing for business are now part of an increasingly integrated and world-leading region.
What this looks like in practice depends on the location and sector. As we explore here:
- Hong Kong plays a key role – particularly in the banking and finance sector
- significant developments have occurred in the past year in bonds, insurance and mortgages
- links between capital markets in Mainland China and Hong Kong have strengthened, and
- service industries across the region are increasingly integrated, including legal.
The 9 cities and 2 Special Administrative Regions which make up the GBA are integrating at a rapid pace notwithstanding the impact of the COVID-19 pandemic. We anticipate this will continue, requiring financial institutions to pay close attention to legal compliance but also bringing opportunities for businesses here and abroad.
Innovation, opening the financial industry, more convenient finance, deeper co-operation, interconnected financial markets and financial infrastructure are among key measures in China’s 14th Five- Year Plan, the 2019 Outline and the 2020 Guidance[1] for the region.[2]
Hong Kong as an international financial centre
Hong Kong is positioned to continue as an international financial centre envisioned in chief policy guidelines.[3] Those guidelines encourage financial integration and connectivity between Mainland China, Hong Kong and Macau.[4]
By expanding the cross-border use of RMB in the GBA and developing RMB related financing, foreign exchange and other financial products[5], Hong Kong also performs its role as the global offshore RMB hub.
Hong Kong's unique advantages
Increased co-operation in the banking and financial services sector
Access to bond markets - the Bond Connect
Eligible investors in Mainland China gained access to the offshore bond market in Hong Kong in September 2021 under the Southbound Bond Connect scheme.[6] This follows the successful Northbound Bond Connect scheme which began in 2017, allowing eligible investors outside of Mainland China to access the China Interbank Bond Market.
As of January 2022, the Bond Connect scheme had an average daily trading volume of RMB41.1 billion.[7] For a deep dive into details of the Southbound Bond Connect, see our September 2021 alert.
Insurance services expand
The Hong Kong government supports the growth of insurance services across the GBA, including proposals to allow after-sales service centres in the GBA to reduce the need for policy holders to travel to Hong Kong for customer support (an issue highlighted by the impact of the COVID-19 pandemic). The central government of China has also stated its support for Hong Kong entities providing insurance and reinsurance for infrastructure projects under the Belt & Road Initiative.[8]
Hong Kong is positioned to tap into growing opportunities in Mainland China’s reinsurance market, after legislative amendments to facilitate the issuance of insurance linked securities were introduced by the Hong Kong government in March 2021.[9] The initiative will further integrate market participants across Mainland China and Hong Kong, leveraging their respective expertise and knowledge. For more, please refer to our article on the topic.
Support for cross-border mortgages
To help Hong Kong residents buy self-occupied properties in Mainland cities in the GBA, local government bodies in Guangdong introduced implementation measures in 2020.[10] The measures require municipal governments in the GBA to support cross-border mortgage registration and create new opportunities in cross-border mortgage business for offshore banks outside Mainland China. We look forward to further clarifications, including the scope of eligible Hong Kong residents able to participate in the scheme.[11]
Latest initiatives promoting financial market integration
ETF Connect and Swap Connect
A suite of ‘connect schemes’ links the capital markets in Mainland China and Hong Kong. Trading under the latest “ETF Connect” commenced on 4 July 2022.
The ETF Connect scheme enhances and leverages the existing Stock Connect framework by allowing eligible exchange-traded funds (ETFs) for northbound and southbound trading under Stock Connect. Under this new scheme, Mainland China investors can trade eligible Hong Kong listed ETFs and Hong Kong investors can trade eligible Shanghai and Shenzhen listed ETFs for the first time.
ETFs must satisfy certain criteria to be eligible for trading under ETF Connect. These include trading currency, assets under management threshold, listing duration, benchmark index history, weighting of underlying basket securities and weighting of constituent stocks of applicable benchmark indices etc. The criteria differ slightly between northbound and southbound trading (eg ETFs eligible for southbound trading must not be a synthetic ETF). Eligibility of ETFs will be reviewed semi-annually. If an eligible ETF trading under ETF Connect subsequently fails to meet the relevant criteria, it may be designated as sell-only securities and restricted from accepting further buy-orders.
The inclusion of ETFs in Stock Connect gives domestic and overseas investors access to a wider range of trading products and is likely to appeal to both retail investors and institutional investors who wish to find an extra avenue for cross-border investment. For our thoughts on ETF Connect scheme, see our alert here.
The SFC, PBOC and HKMA also jointly announced[12] in early July that China Foreign Exchange Trade System (National Interbank Funding Centre), Shanghai Clearing House and OTC Clearing Hong Kong Limited will be developing mutual access between Hong Kong and Mainland China interest rate swap markets through “Swap Connect”, to promote the development of financial derivatives market between Mainland China and Hong Kong. It is expected that Swap Connect will be officially launched around January 2023.
Wealth Management Connect
Another long awaited connect scheme was launched in September 2021: the cross-boundary Wealth Management Connect.[13]
This scheme allows individual residents in the GBA to carry out cross-border investment in wealth management products distributed by banks in the GBA through a closed-loop funds flow channel, with both a Southbound Scheme and a Northbound Scheme. The scheme offers GBA residents with more investment options in both local and foreign currencies and facilitates further cross-border investment in the GBA and promote the cross-border circulation and use of RMB.[14]
Mainland GBA customers can receive direct wealth management services from banks in Hong Kong, in contrast to the existing mechanism whereby they indirectly buy wealth management products developed by Mainland Qualified Domestic Institutional Investor institutions.
The Wealth Management Connect scheme provides additional opportunities but has limitations. The current individual investment quota of RMB1 million, combined with the limited range of products currently available, may not attract investments from high net worth individuals in the GBA.[15] We look forward to further adjustments to the scheme in the near future to increase the investment thresholds and broaden the range of products offered in order to make the scheme more appealing to the large number of high net worth individuals based in the GBA.
See our thoughts on key trends and remaining challenges on the scheme here.
Qianhai Modern Service Industry Cooperation Zone
Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone is a role model for the opening-up of the financial services sector in the GBA and a showcase for the in-depth cooperation between Mainland China and Hong Kong. New incentives, together with the expansion of Qianhai, will encourage more companies to establish and develop their GBA focused businesses in Qianhai.
In September 2021, the central government of China announced the expansion of the zone[16] and in October 2021 construction of the Qianhai Shenzhen-Hong Kong International Financial City began.[17] Under these initiatives Hong Kong and other foreign financial institutions are encouraged to establish offices in Qianhai to facilitate the growth of their businesses in the GBA.
Financial and other incentives were also announced by the Qianhai Management Authority in November 2021 to support financial institutions in establishing new offices, and continuing to operate such offices, in Qianhai.[18] Wholly owned Hong Kong enterprises registered in Qianhai can choose Hong Kong law as the governing law for contracts even where there are no foreign related elements, due to a Qianhai regulation change following discussions between the central government of China and the governments of Hong Kong and Shenzhen.[19] This recognises the strength of the Hong Kong legal system and the preference that Hong Kong companies may have to document their transactions under a common law legal system.
Legal developments and integrated laws
The legal services sector has become more integrated across the GBA. A pilot scheme allows Hong Kong lawyers to practice civil and commercial law in the nine cities of the GBA, following completion of the necessary training and examinations.[20] A number of KWM lawyers in Hong Kong have taken part in this pilot scheme.
The reciprocal recognition and enforcement of judgments and arbitral awards between Hong Kong and Mainland China has also advanced. Parties can enforce Mainland China arbitral awards simultaneously with both Mainland China courts and the High Court of Hong Kong under changes which came into effect in May 2021.[21] The Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Bill was also gazetted in April 2022 to facilitate the recognition, registration and enforcement of judgments between Mainland China and Hong Kong.[22]
Financial institutions must pay close attention to their compliance with local law to ensure all relevant laws and regulations are complied with in Hong Kong and Mainland China when conducting business across the GBA. This is particularly the case in relation to the storage and handling of personal data, under the Personal Information Protection Law which came into effect in November 2021.
Looking ahead
If the GBA were a nation state it would rank among the world’s top ten. This urban cluster around the delta of the Pearl River will continue to grow in economic size and prominence.
We will watch and share our knowledge of the developments of this thriving zone, where many of us work and live.
For capitalized terms which are not defined in this alert, please refer to 'Sidebar - The Words We Use' in our foreword here.
Disclaimer: This alert is provided for general information purposes only and does not constitute legal advice.
References
[1] https://www.bayarea.gov.hk/en/resource/mainland-policies-measures-20200514.html
[2] https://www.kwm.com/cn/en/insights/latest-thinking/law-and-practice-in-the-greater-bay-area-iii.html
[3] https://www.kwm.com/hk/en/insights/latest-thinking/law-and-practice-in-the-greater-bay-area-ii.html
[4] https://www.kwm.com/hk/en/insights/latest-thinking/new-plans-to-support-gba-unveiled.html
[5] https://gba.investhk.gov.hk/en/facilitation-measures/financial-services.html
[7] https://www.chinabondconnect.com/en/Data/Market-Data.html
[8] https://www.news.gov.hk/eng/2021/12/20211207/20211207_120259_626.html
[9] https://www.kwm.com/cn/en/insights/latest-thinking/law-and-practice-in-the-greater-bay-area-iii.html
[10] http://www.cnbayarea.org.cn/policy/policy%20release/policies/content/post_265307.html
[11] https://www.kwm.com/cn/en/insights/latest-thinking/law-and-practice-in-the-greater-bay-area-iii.html
[14] https://www.hkma.gov.hk/eng/key-functions/international-financial-centre/wealth-management-connect/
[16] https://www.info.gov.hk/gia/general/202109/06/P2021090600594p.htm
[17] http://www.sz.gov.cn/en_szgov/news/infocus/Qianhai/news/content/post_9298658.html
[18] http://www.szqh.com.cn/What_is_News_Promotion_Event/content/post_9415807.html
[19] https://www.info.gov.hk/gia/general/202109/06/P2021090600594p.htm
[21] The Arbitration (Amendment) Ordinance 2021
[22] https://www.info.gov.hk/gia/general/202204/20/P2022042000199.htm