China Opens Wealth Tap to Hong Kong Amid Political Crackdown

China moved to deepen its economic grip on Hong Kong, opening up further investment flows to the city at the same time as authorities in Beijing push to quell political dissent.

Regulators on Monday announced the kick off of a long anticipated program called Wealth Management Connect, which will allow residents in Hong Kong, Macau and southern China to invest across the border. Flows will be handled in a “closed-loop” with designated remittances and investment accounts, the People’s Bank of China said in a joint statement with the monetary authorities of Hong Kong and Macau.

Investments flowing both north and south will be subject to aggregate and individual quotas and carried out in yuan, with currency conversion conducted in the offshore market. The date of a formal launch and other details, such as what investments will be allowed, will be announced after a consultation.

The plan “has strategic importance, reinforcing Hong Kong’s position as a wealth management hub,” Sally Wong, chief executive officer of Hong Kong Investment Funds Association, said by phone. “It provides important investment channels for mainland investors to achieve diversification.”

As Beijing seeks to quash a year of unrest in Hong Kong with the introduction of a new security law, authorities have also sought to tamp down concern over the city’s status as an international finance hub. Mainland investors have boosted stock purchases through the stock connect link over the past weeks and a string of high-profile Chinese companies have listed shares in the city.

Local authorities have also sought to reassure investors that Hong Kong will remain a stable place to invest, with Chief Executive Carrie Lam lobbying for more financial integration to build the city’s presence as a global hub for private wealth and make it a more prominent offshore renminbi center. While there has been no sign of an exodus of cash, Hong Kong’s rich are increasingly hedging their bets amid the worst economic and political crises since the handover.

The U.S. overnight escalated pressure on China over its crackdown on Hong Kong by making it harder to export sensitive technology to the city as Beijing is poised on Tuesday to pass the security law. The Commerce Department said it’s suspending regulations allowing special treatment to Hong Kong over things including export license exceptions.

Turmoil notwithstanding, firms that could stand to benefit from the new wealth plan include life insurers in Hong Kong, which have struggled with a drop off in inflows from Chinese customers due to the protests and the pandemic. Insurers like AIA Group Ltd. are among those that could see increased business, Citigroup Inc. analysts wrote in a note.

“The move is certainly good news to asset managers and the financial industry in Hong Kong and Macau, and can be seen as a concrete step to support Hong Kong’s role as a global financial center,” said Ren Zhiyi, a Shanghai-based partner at law firm Fangda Partners. The plan has other “broad implications,” ranging from boosting the yuan’s international use and testing the cross-border collection of citizens’ financial data, he said.

In May, the nation’s financial regulators unveiled a sweeping plan to facilitate cross-border transactions and investments between Hong Kong, Macau and cities in southern China. Policy makers are seeking to turn the so-called Greater Bay Area into a high-tech megalopolis to rival California’s Silicon Valley.

Greg Hingston, Asia Pacific head of wealth and personal banking at HSBC Holdings Plc, said the so-called Greater Bay Area is “the wealthiest urban cluster in China” with expected banking revenue of $185 billion by 2025.

But economists also cautioned that the scope of the wealth plan has limits.

It provides another channel of capital account convertibility beyond the current $50,000 annual limit for individuals, said Xing Zhaopeng, an economist at Australia and New Zealand Banking Group Ltd. in Shanghai, “But it will not cause significant flows because it’s limited to individuals not institutions.”

©2020 Bloomberg L.P.

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