Go with the flow

A key beneficiary: Hong Kong

What happens when some of mainland China’s wealthiest households get new access to investment opportunities in Hong Kong? Hundreds of newly employed wealth management staff at Hong Kong’s banks are about to find out, with the launch of the Greater Bay Area’s Wealth Management Connect scheme.

First announced last year, the programme is expected to go live in the next few weeks, allowing up to Rmb300 billion ($46 billion) of investment flows between the special administrative regions of Hong Kong and Macau and the nine mainland Chinese cities in the GBA.

Wealth Connect is a pilot programme and will join Stock Connect and Bond Connect as cross-border conduits, although a key difference is that it will be exclusive to the GBA and does not apply at national level.

Investors from mainland China will be allowed to channel their funds into investments packaged in Hong Kong and Macau, although they will have to prove that they are residents with hukou (household registration permits) in the GBA. They will also need to demonstrate two years of investment experience and at least Rmb1 million in net household financial assets in the previous three months.

Investors from Hong Kong and Macau will get access to a ‘northbound’ channel under different rules still to be confirmed by local regulators.

Banks in Hong Kong already sell wealth management services to Chinese customers via their onshore branches. But they’ve been bulking up their teams in expectation that the scheme will allow them to offer a broader choice in offshore assets and non-yuan products.

For the GBA’s backers the pilot plan is one of the most convincing steps yet in the coalescing of the zone’s $1.7 trillion economy (see WiC542 for our latest Q&A on the GBA’s progress). But the broader backdrop is how it could open up new avenues for mainland investors at a time when household wealth is set to surge by at least 50% over the next five years, according to HSBC.

This is one of the forecasts in The rising wealth of China – a research report published by the bank’s economics team last month. It highlights how household wealth has surged thanks to China possessing the world’s fastest-growing large economy and very high savings rates (Chinese households save about 45% of their income, well above the global average of 25%).

The two trends will take investable assets to Rmb300 trillion by 2025, HSBC predicts. Of course, household wealth in the GBA is a smaller share of the total, although the region is one of the richest in the country and home to some of its fastest-growing companies.

HSBC analysts say the surge in wealth among high-net-worth individiduals and millions of new members of the middle-class should stop China from falling into the “middle income trap” and underpins the government’s efforts to make the economy more consumption-led.

But policymakers will also have to respond to the nation’s wealth gap – a trend that means that the top 1% of households now own over 30% of the wealth.

Expect further efforts to pull less advantaged people into the ranks of the middle-class – such as migrant workers and new university graduates – the bank says.

Another query raised by the research is how China’s property sector is going to react as millions more people get a glimpse of new investment choices through arrangements like Wealth Connect.

Property accounts for about 40% of household assets in China, with urban ownership rates reaching an incredible 96% (on average, urban households own 1.5 residential properties). Part of the reason is cultural, such as expectations that married couples should own their own homes, but another factor is that there have been fewer alternatives for people to invest their savings.

As that starts to change there is the question of what it might mean for the next generation of property purchases, especially as an aging population passes on homes to family members, dulling another source of potential demand.

Policymakers will be keeping an eye on the early indicators from GBA cities, which boast home prices far above the national average (see this week’s “property” for more on Shenzhen’s surging property market).

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