What China's new Wealth Management Connect could mean for global markets

Last week mainland Chinese and Hong Kong regulators announced the rollout of Wealth Management Connect, which will allow residents in the Greater Bay Area (GBA) to purchase wealth management products offered by Hong Kong-based providers.

Wealth Management Connect will allow residents in the Greater Bay Area, a cluster of high-growth cities in Southern China, to buy approved wealth management products in Hong Kong and Macau, and it lets Hong Kong and Macau residents buy products offered by providers based in the GBA. The scheme will facilitate up to RMB 300bn (US $46.5bn) in total investment flows, half going in each direction.

The scheme is a significant and much anticipated development in the gradual relaxation of China’s tight capital controls. If successful, similar schemes and national implementation should be expected in the future.

Chinese policymakers tend to use GBA as a testing ground for new policies that eventually may be launched nationwide. The GBA stands out because of its optimal mix of manufacturing and financial hubs, cross-border access facilitated through Hong Kong, and the availability and density of talent. The region is also home to about half million people with financial assets in excess of US$ 1 million.

The stakes for industry and policymakers to get Wealth Management Connect right are high. China remains the world’s most exciting financial services and wealth management market and Hong Kong, part of the GBA, has historically served as a gateway to this market. However, Singapore has managed to establish itself as an important financial hub in Asia and the most obvious competitor to Hong Kong and the GBA.

But the success of the scheme doesn’t only matter for the region. It has implications for China as whole. Its success is critical for achieving greater connectivity between Chinese and global markets down the road. If the scheme is taken up by individuals in the region, then it can provide one example for how China could over time facilitate the flow of capital into regional and global markets. The implications would be profound. HSBC estimates that Chinse households will have US $46.3 trillion of investible assets by 2025. That’s more than the entire US bond market.

While presenting a major opportunity for the financial services and asset management industry, the development of wealth management offerings in China and the Wealth Management Connect in particular, are also an important tool to help mainland investors achieve greater asset diversification. The current cash crisis at Chinese property giant Evergrande highlights the risk posed by what many describe as an overvalued Chinese property market. Chinese households tend to a have significant share of their wealth invested into real estate. Giving them an option to diversity into other asset classes and geographies through sophisticated products reduces risk and smoothens returns in the long run.

A new report launched by the World Economic Forum and Oliver Wyman on September 8 explains the role of the Greater Bay Area in connecting China with global asset management. It highlights four enablers industry and policymakers in the GBA need to get right in order to maximize the regions potential: upgraded product, effective data-powered operating models, talent mobilization and efficient money flow.

And while the focus currently is very much on the Wealth Management Connect scheme, the reports argues that the GBA presents a much larger opportunity to transform wealth and asset management in China and test new products and approaches.

The evaluation of investment opportunities through non-financial metrics – such as environmental, social and governance criteria – has gained significant traction globally over the past years. Adoption in China lags behind, but the country has the potential to catch up rapidly. ESG-focused products could be rolled via the GBA as individuals in the region tend to be well-educated and hungry for new investment options.