2020.07.08 XIE, Qing (Natasha)、QIN, Tianyu、FANG, Hao
On June 29, 2020, the People’s Bank of China, the Hong Kong Monetary Authority, and the Monetary Authority of Macao decided to implement the cross-boundary wealth management connect pilot scheme (“WM Connect”) in the Greater Bay Area of Guangdong, Hong Kong and Macao (“Greater Bay Area”) and issued a joint announcement (“Announcement”) on matters concerning the WM Connect. The date of its formal launch and detailed rules for implementation remain to be specified. Below we set forth both our interpretation of the Announcement as well as a look ahead at the pilot.
Currently, the WM Connect is restricted to the Greater Bay Area (Guangdong, Hong Kong and Macao collectively referred to as the “Two Places”, and separately referred to as the “Mainland” and “Hong Kong and Macao”) and comprised of a southbound component (“Southbound Connect”) and a northbound component (“Northbound Connect”). Under the Southbound Connect, Mainland residents in the Greater Bay Area may purchase eligible investment products distributed by banks in Hong Kong and Macao by opening designated investment accounts with these banks; while under the Northbound Connect, residents of Hong Kong and Macao may purchase eligible wealth management products distributed by Mainland banks in the Greater Bay Area (“Mainland Banks”) by opening designated investment accounts with these banks.
We view the WM Connect, echoing other connect and cross-boundary investment schemes, to be a part of the Central Government’s gradual relaxation of China’s capital control and itself is very limited in scope, and so bears a low risk exposure. The reasons are set forth below.
First of all, the WM Connect is a cross-boundary two-way investment scheme under the capital account items for individual residents, which is geographically limited to the Greater Bay Area and only available for specific wealth management products. The Southbound Connect can be deemed as a special type of Qualified Domestic Individual Investor (i.e., QDII2) scheme targeted at specific regions and with specific investment restrictions, which parallels and supplements existing cross-boundary investment schemes for individuals, such as southbound of the stock connect (Stock Connect), Qualified Domestic Institutional Investor (QDII), southbound of the mutual recognition of funds between Mainland and Hong Kong (MRF), Qualified Domestic Limited Partner (QDLP) and Qualified Domestic Investment Enterprise (QDIE).
Secondly, the Central Government has decided to launch the WM Connect on the premise that the risks arising therefrom will be properly controlled and dealt with. Therefore, while implementing the WM Connect, the Central Government follows the principle of prudence and stability, and in doing so specifically adopts three measures, namely, (1) closed-loop fund flow: cross-boundary remittance under the WM Connect will be conducted and managed in a closed-loop through the bundling of designated remittance and investment accounts to ensure that the relevant funds will only be used to invest in eligible investment products; (2) quota management: cross-boundary fund flows under the Northbound and Southbound Connects will be subject to aggregate and individual investor quota management, with the aggregate quota adjusted through a macro-prudential coefficient; and (3) restrictions on scope of products: the scope of eligible investment products under the WM Connect will be highly restricted. It is foreseeable that such prudent measures, such as closed-loop fund flow, quota management, and restriction on the scope of invested underlying assets, may join with the trials and attempts throughout the relaxation of China's capital control and become common risk prevention measures.
Thirdly, as an innovative pilot scheme for cross-boundary investment, the WM Connect has great potential for growth. With the rollout of the pilot scheme, the geographic scope of the WM Connect may be further expanded once it proves to be a replicable model.
Since the detailed rules for implementation of the WM Connect have not yet been released, the scope of eligible investors and eligible products still remains unclear. We understand that the following two points need further clarification.
It is unclear who will be deemed as "residents" of each of the Two Places. We understand that the detailed implementation rules will further clarify the conditions an eligible individual must meet and the materials required to be submitted for such individual to participate in the WM Connect.
Since the WM Connect is currently in a pilot stage, we anticipate there will be strict restrictions on the scope of eligible products. For example, the scope of eligible products may be limited to relatively mature products suitable for ordinary investors. Pursuant to the Announcement, the current investment scope is limited to investment products/wealth management products distributed by banks of the Two Places. Since the investment products that can be distributed by Hong Kong banks are not limited to bank wealth management products, but also include funds and insurance wealth management products, and some overseas products may also be distributed in Hong Kong after completing relevant procedures, it remains to be clarified whether the aforesaid products may be included in the scope of eligible products under the Southbound Connect. As for the Northbound Connect, since Mainland banks can distribute not only bank wealth management products, but also asset management products issued by fund houses, trust companies and securities brokers, it is especially notable how the eligibility requirements for products under the Northbound Connect are determined.
We expect that, in addition to an aggregate quota restriction, there will be quota restriction on each individual investor participating in the WM Connect, and such quota restriction is more likely to be a single threshold universally applied to all individual investors. At the same time, given that WM Connect is initially designed to benefit ordinary investors, not just high-net-worth individuals, in the Greater Bay Area, we reckon that the quota for each individual investor might not exceed one million RMB.
Currently, the WM Connect is only a pilot implemented in a specific area. If it turns out to be successful, we have grounds to believe that the model of the WM Connect may be duplicated in other Mainland regions, expanding its geographical scope of pilot.
It is foreseeable that, after the release of the detailed implementing rules, financial institutions of the Two Places will actively make relevant preparations and select the appropriate products for their debut distribution under the WM Connect according to the relevant eligibility requirements. We understand that the WM Connect will bring opportunities for large banks and leading mutual fund management companies of the Two Places. Nevertheless, given the lack of detailed implementation rules, it is not yet possible to fully evaluate the resources and costs needed to compete for the first-move advantage in the WM Connect. Considering that the WM Connect, as a major step for a trial of relaxation of capital control, has large potential for growth, we believe that participation in the WM Connect will inevitably become one of the most fiercely competitive areas for leading institutions of the Two Places. Accordingly, relevant institutions of the Two Places need to actively prepare for the implementation of the WM Connect and incorporate this strategy into their long-term planning.
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
To facilitate cross-boundary investment by individual residents in the Guangdong-Hong Kong-Macao Greater Bay Area (the Greater Bay Area), the People’s Bank of China, the Hong Kong Monetary Authority, and the Monetary Authority of Macao have decided to implement the cross-boundary wealth management connect pilot scheme (“Wealth Management Connect” hereafter) in the Greater Bay Area. It is hereby announced that:
1. Wealth Management Connect refers to the arrangement under which individual residents in the Greater Bay Area carry out cross-boundary investment in wealth management products distributed by banks in the Greater Bay Area. The scheme has a southbound and a northbound components, depending on the residency of the investors. Under Southbound Wealth Management Connect, residents of the Mainland cities in the Greater Bay Area can invest in eligible investment products distributed by banks in Hong Kong and Macao by opening designated investment accounts with these banks; under Northbound Wealth Management Connect, residents of Hong Kong and Macao can invest in eligible wealth management products distributed by Mainland banks in the Greater Bay Area by opening designated investment accounts with these banks.
2. Wealth Management Connect is an important measure by the nation in support of the Greater Bay Area development and closer financial cooperation between the Mainland, and Hong Kong and Macao. It is conducive to the creation of a quality living environment within the Greater Bay Area. It facilitates cross-boundary investment by individual residents in the Greater Bay Area and promotes the opening-up of the Mainland’s financial markets as well as the mutual social and economic development of the Mainland, and Hong Kong and Macao.
3. Wealth Management Connect will be governed by the respective laws and regulations on retail wealth management products applicable in the three places with due regard to international norms and practices. The People’s Bank of China, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission, the State Administration of Foreign Exchange, the Hong Kong Monetary Authority, the Hong Kong Securities and Futures Commission, and the Monetary Authority of Macao will discuss and agree on the implementation details including investor eligibility, mode of investment, scope of eligible investment products, investor protection, handling of disputes, etc. under the Northbound and Southbound Wealth Management Connect. Cross-boundary remittance under the scheme will be conducted and managed in a closed-loop through the bundling of designated remittance and investment accounts to ensure that the relevant funds will only be used to invest in eligible investment products. Cross-boundary remittances will be carried out in RMB, with currency conversion conducted in the offshore markets. Cross-boundary fund flows under Northbound and Southbound Wealth Management Connect will be subject to aggregate and individual investor quota management. The aggregate quota will be adjusted through a macro-prudential coefficient.
4. Relevant regulators in the Mainland, Hong Kong and Macao will each take necessary measures to establish effective mechanisms under Wealth Management Connect to tackle, based on the principle of territorial administration, any illicit activities in a timely manner, with a view to protecting the interest of investors. Relevant regulators in the Mainland, Hong Kong and Macao will enter into memoranda of understanding on supervisory cooperation to establish robust supervisory cooperation arrangement and liaison mechanism in order to protect investors’ interest and maintain orderly and fair trading.
5. The Mainland financial infrastructure institutions should actively take forward preparations for Wealth Management Connect in an orderly manner and with prudent risk management. The Wealth Management Connect pilot scheme will be formally launched once relevant rules and systems are in place.
The date of formal launch of Wealth Management Connect and implementation details will be separately specified.
29 June 2020