- The demand for overseas wealth management products in China is growing but restrictions make moving money difficult.
- The Greater Bay Area in China is testing a new initiative to facilitate investments and capital flows to Hong Kong and back.
- A new report identifies four key enablers that will help industry and public sector leaders achieve success.
Chinese household wealth is growing at an amazing rate. Traditionally, household wealth found its way into savings accounts or real estate investments, but as wealth spreads more broadly across the country and individuals become knowledgeable about other investment options, the demand for sophisticated wealth management products is growing. That can lead to a desire to invest money overseas. However, due to the capital controls policy, moving money out of China is difficult.
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To experiment with new approaches on how to offer Chinese investors greater overseas exposure, policymakers have turned to the Greater Bay Area (GBA), a cluster of high-growth cities in Southern China. New initiatives are being tested there before they might eventually be rolled out nationally. Among these initiatives is the Wealth Management Connect (WMC) Scheme which policymakers in the GBA and in Hong Kong are about to launch.
Initiatives like WMC are an important step for achieving greater connectivity between Chinese and global markets and their success is critical. Our new report, From Sandbox to Bridge: The role of the Greater Bay Area in Connecting China with Global Asset Management, argues that four enablers will help industry and public sector leaders achieve success.
The idea behind WMC – which will facilitate up to RMB 150 billion ($23 billion) to be invested in either direction between Hong Kong and mainland China – is simple: residents of the GBA can purchase wealth management products offered by Hong Kong providers, and Hong Kong residents can purchase products offered by GBA providers. Investors on both sides get exposure to markets on either side of the border and tens of billions of dollars could start flowing between markets.
The appetite for schemes like WMC is huge. A proprietary survey of GBA residents conducted by Oliver Wyman found that almost 90% of respondents are unfamiliar with foreign financial products yet they do plan to invest more overseas. They see overseas investments as a way to diversify risks and invest for the long-term.
There is significant potential to leverage the GBA as one integrated market to transform Chinese wealth and asset management, with the ultimate benefit being the ability to realize cross-border investments and capital flows that are yet to be effectively facilitated. There are four key enablers to bring this vision to reality:
1. Offer upgraded products and an enhanced experience
Investors are expecting upgraded products. A compelling product portfolio is even more important now that access to global offerings is within reach. At the same time, product alone is not enough. Service providers will need to enhance the entire investment experience and address investors’ fundamental gaps in cross-border investment knowledge and access to information.
2. Adopt operating models that deliver consistent service
Wealth management and financial services players need to adopt effective operating models that can deliver consistent service levels to clients. The challenge they face is that digitization levels differ between mainland China, Hong Kong and Macau. These differences need to be overcome to provide clients with a consistent experience and the most digitized market – mainland China – should set the standard. In addition, asset managers also need to address infrastructural differences between China onshore and offshore to deliver consistent speed, accuracy and efficiency to the market.
3. Mobilize the flow of cross-border talent
Policymakers and industry must find ways to effectively mobilize the flow of talent. Currently, around 1.5 million mainland Chinese have been given permanent residence within Hong Kong, and there are around 0.5 million Hong Kong citizens who work on a long-term basis in mainland China. With increasing cross-border mobility, talent can move more easily, and the industry can utilize the GBA pool more effectively to operate as an integrated market. There’s strong potential to adopt a talent hub model in the GBA, and it will be important to develop a quality work-life environment for employees.
4. Invest in innovative infrastructure
More innovation is needed in the infrastructure enabling the flow of money. This is important to facilitate the massive growth in transactions resulting from cross-border investment schemes and vehicles expanding. WMC is only the beginning, and in the future potentially more types of financial institutions as well as digital players will be participating in new opportunities. The time to develop robust infrastructure that can absorb this growth is now.
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If industry and policymakers get these enablers right, then the GBA could unlock tremendous opportunities. Not only does the region facilitate the flow of money in and out of mainland China with Hong Kong playing a critical role. The GBA also offers itself as an ideal testing ground for how to advance frameworks that can facilitate the growth of environmental, social and governance (ESG) investing in China.
Considering non-financial metrics, for example a company’s carbon footprint, when making investment decisions will be important in order to achieve China’s goals of reaching carbon peak by 2030 and carbon neutrality by 2060. The country remains in its infancy for ESG investing and current ESG strategies face low adoption. If utilized effectively, the GBA can help overcome current barriers by leveraging its international ties and infrastructure, testing potential new market standards, and enable domestic asset managers to monitor investor appetite before rolling out their offerings.
The eventual impact of greater money flows between China and the world will have significant impacts on global capital markets. Industry and policymakers need to take advantage of the GBA to ensure new opportunities are rolled out in an effective manner. The GBA can only serve its bridge function if public and private sector leaders share a common vision and co-create an enabling environment. The benefits of collaboration will not only be felt by households in China but investors anywhere.
This was originally featured on Caixin.