Wealth management connect: here’s what you need to know about the scheme that excites your bankers

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China is soon expected to launch the wealth management connect, the first cross border investment scheme in the Greater Bay Area, its latest move to further open up the mainland’s financial market and promote economic integration in the region.

Additional details about the scheme, first mentioned in a blueprint about the Greater Bay Area‘s development in February 2019, were released last week. The scheme is expected to facilitate a total fund flow of 300 billion yuan (US$46.5 billion) in terms of sales in investment products.

While China still has capital controls, it has in recent years introduced various cross-border trading schemes to gradually open up its markets, allowing mainland investors to diversify their investment. The launch of the wealth management connect is important for the bay area’s development to encourage capital flows and investment among the 11 cities to turn them into an economic powerhouse.

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Hong Kong’s Financial Secretary Paul Chan Mo-po last week said the scheme “will be rolled out very soon”. Here are a few details about the plan.

What is wealth management connect?

The wealth management connect will allow Hong Kong and Macau residents to buy mainland investment products sold by banks in the Greater Bay Area. Likewise, residents of the nine Guangdong cities will also be allowed to buy investment products sold by banks in Hong Kong and Macau.

It is the first cross border scheme focused solely on the Greater Bay Area. Other connect schemes for stocks and bonds trading have been launched previously, but they were rolled out nationally.

Who can invest in the scheme?

In the northbound route, Hong Kong and Macau residents can invest in wealth products offered by mainland banks with no particular restrictions.

In the southbound direction, it’s a bit different. Only two categories of Chinese residents can participate in the scheme. They are those who have a hukou – or a household registration – in the nine mainland cities of the Greater Bay Area or if they have paid individual tax or social security in these cities for five years. Besides, t hey must also have at least two years of investment experience and a household net worth of 1 million yuan.

The responsibility for conducting due diligence on a client falls on banks. They also need to make sure the client’s source of funding does not breach any money-laundering regulations and ensure the client is not involved in tax evasion.

Are there any quotas under the scheme?

Yes. The authorities have set an aggregate quota of 150 billion yuan in each direction.

Individuals can only invest up to 1 million yuan in investment products. Hong Kong-based lenders have expressed a desire to raise the cap to attract high net worth customers, according to Eddie Yue Wai-man, chief executive of the Hong Kong Monetary Authority.

Can people buy from their brokers or investment companies?

No. The scheme only allows banks to sell the products. Each bank will also need to work with a partner bank across the border to handle account opening, conduct clients’ background check, fund transfer, investor education and customer complaints. Each customer can only sign up with one bank.

“Currently the scheme only benefits banks,” said Christopher Cheung Wah-fung, a lawmaker for the financial services sector. “We hope Beijing will expand the scheme to allow the 600 local brokers to help to sell the products.”

Can investors sell the products anytime they like and get their money back?

Yes. Investors can redeem the funds or sell the wealth products whenever they want to. They, however, cannot invest the redeemed funds in other products or equities.

What products can investors buy under the scheme?

The scheme only covers fund products classified as low and medium risk in the mainland. These include money market funds, bond funds, stock funds and index funds. Complex investment products with high volatility or leverage are excluded.

How are banks preparing for the launch?

Local lenders such as HSBC, Standard Chartered, Bank of China (Hong Kong) and Bank of East Asia have all set up Greater China teams to tap opportunities arising from the wealth management connect and other developments in the area.

HSBC, the biggest lender in the city, said it was on track to recruit 1,000 staff in wealth management in Asia with a US$3.5 billion bet over the next five years.

The wealth management connect scheme is credit positive for mainland Chinese, Hong Kong and Macau banks and their asset management units, said Sonny Hsu, vice-president and senior credit officer at Moody’s Investors Service.

“However, the banks’ potential fee revenue from the scheme will be limited as the northbound and southbound investments are initially capped at 150 billion yuan respectively,” Hsu said.