Who wins, who loses in China's plans for a Greater Bay Area wealth management hub?

Banks that straddle China's borders look set to be the major beneficiaries of a new wealth management scheme catering to over 70 million people living in the Greater Bay Area.

Meanwhile, private banking boutiques, brokers and insurance companies are effectively barred from selling products via the scheme, dubbed Wealth Management Connect, according to regulators and industry professionals.

China's outline of the Wealth Management Connect pilot project, unveiled on June 29, was short on detail.

But regulators and industry professionals' working plan is that only banks with a partner on the other side of the border will be eligible to sell wealth management products under the scheme, people familiar with the matter said.

Hong Kong can benefit from the closer economic collaboration with the bay area, said Peter Wong, the deputy chairman and chief executive of Hongkong and Shanghai Banking Corporation Ltd, a unit of HSBC Plc. "We are already prepared for mainland investors to open mutual fund and investment accounts in Hong Kong," said Wong.

HSBC is present in all 21 prefecture-level cities in Guangdong, and more than a third of its outlets in mainland China are located in the Guangdong Province.

Financial institutions such as Bank of China, London-headquartered HSBC and Bank of East Asia (BEA) will be in a strong position as they have operations in both Hong Kong and the mainland, said Bruno Lee, chairman of the Hong Kong Investment Funds Association.

For most banks, selling wealth management products in the bay area represents a growth opportunity at a time when business is flagging because of the economic fallout from the coronavirus and anti-government protests.

"BEA is well positioned to serve the different investment needs of our customers in the region," said Adrian Li Man-kiu, co-chief executive of BEA. BEA has 75 branches in Hong Kong and 25 branches in the nine cities in the bay area.

The bay area is one of the world's largest banking clusters with revenues expected to reach US$185 billion by 2025, a 10.3 per cent compound annual growth rate, according to analysis by HSBC.

Adrian Li Man-kiu, deputy chief executive, Bank of East Asia. Photo: Jonathan Wong alt=Adrian Li Man-kiu, deputy chief executive, Bank of East Asia. Photo: Jonathan Wong

Hong Kong's investors are likely to be more active users of the Wealth Management Connect than mainlanders, at least initially, said analysts.

Fixed income products are likely to be most in demand, given the widening interest rate spread versus offshore wealth management products. As the global hunt for yield accelerates with most of the developed world's interest rates around zero, mainland China's fixed-income wealth management products are looking increasingly attractive.

Hong Kong investors already have access to the mainland's equity markets via a mutual recognition scheme called Stock Connect, but the fixed-income equivalent, Bond Connect is reserved for institutional investors only.

This again puts banks such as HSBC and Bank of China (Hong Kong) in strong positions, as both have strong debt franchises and can work with their mainland China businesses to distribute products.

Foreign banks from 13 countries and regions had established a total of 155 business institutions in Guangdong province, excluding Shenzhen, as of February.

HSBC's Peter Wong sees potential in bay area. Photo: Jonathan Wong alt=HSBC's Peter Wong sees potential in bay area. Photo: Jonathan Wong

Goldman Sachs analysts highlighted China Merchants Bank and Ping An Bank, both headquartered in Shenzhen, as retail banks with strong networks in Guangdong. Both also have branches in Hong Kong.

Privately owned banks had a 41 per cent share of mainland China's US$3 trillion market of wealth management products as of June last year, more than 37 per cent commanded by the large state-owned banks, Goldman Sachs said. The market on the mainland is heavily skewed towards fixed-income products.

The financial zone in Foshan Nanhai Gaoxin district, Guangzhou. Photo: Xiaomei Chen alt=The financial zone in Foshan Nanhai Gaoxin district, Guangzhou. Photo: Xiaomei Chen

The flip side of this neat arrangement is that banks without a partner in China are at a disadvantage. Boutique private banking players with no mainland partner, for example, could struggle to capitalise on the scheme.

A European private boutique bank executive, who declined to be named, said the scheme would be of little benefit to small private banks which have a limited presence in mainland cities.

He also said the scheme was unappealing for his clients as it does not allow mainlanders to remit funds outside Hong Kong. Once the clients sell an investment made via the scheme, the money must return to the mainland. This also means financial firms not covered by the plan will not be able to capture any funds indirectly.

Private banking and wealth management boutiques with a presence in Hong Kong include Swiss-headquartered Pictet and Lombard Odier, as well as Liechtenstein-based LGT.

Smaller private banks could still seek a tie-up with a firm in the bay area, said Lee.

Also, regulators' emphasis on purely plain vanilla products means the scheme is likely to be less relevant to the largest private banking firms. Swiss banks UBS and Credit Suisse serve billionaires with products at the more complex and riskier end of the range.

Insurance companies are also unlikely to get a windfall from the Wealth Management Connect scheme. Savings-oriented insurance products probably won't be included in the scheme, said analysts.

"It's unlikely to include regular premium policies, as it would require significant annual expansion of fund flow quota," said Thomas Wang, an analyst at Goldman Sachs.

The Wealth Management Connect scheme differs from the Stock and Bond Connects in that distribution is via banks only " meaning this time brokerage houses will also miss out.

The more than 600 stockbrokers in Hong Kong were disappointed, according to Tom Chan Pak-lam, chairman of the Hong Kong Institute of Securities Dealers.

"We want to urge the Hong Kong government to urge the mainland authorities to expand the sale points to brokers," Chan said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

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