Edmond Lau: Keynote speech - Wealth Management Connect and
Southbound Bond Connect Conference
Keynote speech by Mr Edmond Lau, Senior Executive Director of the Hong Kong Monetary
Authority, at the Wealth Management Connect and Southbound Bond Connect Conference, Hong
Kong, 30 November 2021.
* * *
1. Good morning everyone. I would like to thank Euroclear, HKIFA, FSDC and TMA for hosting
this conference and inviting me to speak. I am glad to see many familiar faces from the
financial industry here.
2. Today's conference is very timely as it focuses on two new members of our family of
Connect schemes which had just been launched, namely, the Cross-boundary Wealth
Management Connect in the Guangdong-Hong Kong-Macao Greater Bay Area, or WMC, and
Southbound Trading under Bond Connect. The successful launch of the two schemes is the
result of many months of preparation and consultation. It also marks another milestone in
the closer integration between the financial markets of the Mainland and Hong Kong. Today,
I would like to share my thoughts on the opportunities and significance of these
developments to Hong Kong's financial industry as well as the broader opening-up of our
country's financial markets.
3. Before we dive into a discussion on the two schemes, let us first take a step back and briefly
revisit the journey of RMB internationalisation. The opening up of the Mainland's capital
account has been a gradual and carefully calibrated process. What's amazing is that in
almost each and every step of this long journey, you can find Hong Kong's footprints. It
started with the commencement of personal RMB business in 2004, then RMB usage in
cross-border trade settlement in 2009, before expanding into direct investment and capital
markets in recent years. The use of RMB in cross-boundary financial investment has a
relatively short history. Pilot schemes with limited scale were made available in the early
2010s, but it was not until the launch of the Stock Connect scheme in 2014 that RMB
became much more widely used in cross-boundary financial investments. It was perfectly
understandable for the capital account liberalisation involving portfolio investment flows to
feature at a later stage given the size and volatility of international capital flows. With the
recent launch of these two new Connects, Hong Kong has essentially assisted the Mainland
in completing the two-way loop of mutual access in a full spectrum of financial markets
including equities, debts and wealth management.
4. On this road towards greater RMB internationalisation and liberalisation of the Mainland's
financial markets, Hong Kong has always been the ideal platform for foreign capital to
access the Mainland market and for Mainland funds to tap into global markets. Hong Kong is
the only gateway of its kind to the Mainland's financial markets because of our unique value
proposition - being a part of China and supporting the country's economic development for
more than four decades, while also being part of the global financial system at the same
time, speaking the common language of international regulatory standards and market
practices. This unique role is hard to be replaced or replicated by other financial centres in
the world.
5. With the Mainland's steady economic development and two-way opening-up of financial
markets, Hong Kong's position as the dominant gateway to the Mainland has continued to
underpin our status as an international financial centre. Our strength is best demonstrated
through the different Connect schemes which have become widely accepted as the
channels of choice for foreign investors to access the onshore financial markets. Currently,
around two-thirds of holdings of Mainland stocks by international investors are held through
the Stock Connect, and more than half of international investors' turnover in onshore bonds
is traded through the Bond Connect. The smooth operation of the Connect schemes was
one of the key factors leading to the inclusion of Mainland equities and bonds into major
global indices.
6. Now let's turn to the opportunities and significance of these two new Connects.
7. The launch of Wealth Management Connect and Southbound Trading under Bond Connect
is significant on several levels. First, the two schemes further deepen and widen the mutual
access between the Mainland and Hong Kong financial markets as outlined in the National
th
14 Five Year Plan. Four years after the start of Northbound Trading, Southbound Trading
completes the two-way connection between the Mainland and international bond markets. It
provides Mainland financial institutions with another convenient channel to invest in offshore
bond assets through Hong Kong. This marks an important milestone in the further opening
up of the Mainland financial system. It is also a key step in strengthening the linkage
between financial infrastructure of the two places, notably between our CMU and Mainland's
CSDs on the debt settlement side and between our RTGSs and CIPS on the cash
settlement side.
8. In addition, WMC broadens the scope of the Connect schemes from the institutional to the
individual investor level, enabling individual Mainland residents in the Greater Bay Area to
directly invest in offshore wealth management products without having to travel across the
boundary. This is a major policy breakthrough and deepens the connectivity of the Mainland
and Hong Kong financial markets in the area of wealth management. This is also in keeping
with the objective to promote the two-way flow of money and other factors of production
within the GBA.
9. Secondly, the launch of the two schemes is timely to meet the increasing need for Mainland
investors - be they individuals or institutions - to more efficiently manage their wealth and
diversify their portfolio allocation through outward investments. Once again, Hong Kong
provides a risk-controlled channel for the outflows of onshore funds to be conducted in an
orderly manner and serves as a reliable gateway for the Mainland's opening up. These new
developments will no doubt attract more Mainland funds into Hong Kong and strengthen
Hong Kong's status as an international financial centre and asset management centre, as
well as further consolidate our role as the global hub for offshore RMB.
10. Thirdly, the launch of the two schemes will substantially enlarge the customer base of our
bond market and wealth management industry. Opening up the Southbound Bond Connect
will inject new momentum into the development of the Hong Kong bond market by bringing
more Mainland investors to Hong Kong and broadening the fixed income investor base of
Hong Kong's bond market. This will in turn attract more liquidity in secondary trading as well
as more primary issuance activities. As a result, international financial institutions will have
stronger incentives to devote more resources in Hong Kong to better provide underwriting,
trading, custodian and related services to Southbound investors. Lately, the dim sum bond
market has witnessed encouraging developments, with a pickup in issuance activities and a
wider variety of issuers. We believe Southbound Trading will help reinforce the growth of our
dim sum bond market in depth and diversity. Since the launch of Southbound Trading on 24
September, the scheme has received a positive response and operations have been
smooth, with transactions covering major bond products tradeable in the Hong Kong market
and denominated in multiple currencies including RMB, HKD, USD and EUR.
11. On the wealth management front, the rapid wealth accumulation in Mainland Chinese
households, especially in the Greater Bay Area, presents significant room for growth for
Hong Kong's financial industry. WMC links up Hong Kong's banking and asset management
industry to one of the most economically vibrant and affluent regions in the Mainland, with a
population of over 70 million and a per-capita GDP of over US$23,000, greater than half of
the G20 economies. The transformation of the Greater Bay Area from "the world's factory"
into a cutting-edge innovation and technology hub has resulted in remarkable growth in
financial wealth and demand for financial services. According to a wealth report on the
Mainland in 2019, the Greater Bay Area accounted for over one-fifth of the entire country's
high-net-worth households with assets amounting to RMB 10 million or more.
12. And this potential remains largely untapped. Let me illustrate this with a few figures. The
Mainland is known as a savings-rich economy with a household savings rate of 35% at the
end of 2019. This was far higher than other major economies including the US and Euro
area which had household savings rates of 7% and 13% respectively. The share of savings
in the Mainland has increased alongside the growth in disposable household income in
recent years. According to a PBoC survey published in 2020, real estate accounts for close
to 60% of household wealth, while the allocation to financial assets is still at a low 20%. In
contrast, 45% of US household wealth is allocated to financial assets, while real estate
makes up 24%. It is reasonable to believe that access to a larger variety of financial
products could help Mainland investors achieve more diversified and balanced asset
allocation.
13. In fact, Mainland investors are increasingly keen to diversify their investments in terms of
geography and asset classes, and having access to a new suite of products through WMC
can meet the evolving needs. Likewise, the Northbound investors could also benefit from
access to a more diversified suite of RMB assets on the Mainland. Attractive returns and a
more stable currency outlook have greatly enhanced the appeal of RMB assets to Hong
Kong and international investors, especially in today's lower-for-longer global rates
environment. WMC provides an opportunity for Hong Kong retail investors to capture the
growth potential of the Mainland economy and seek yield enhancements. This two-way
demand creates a much larger customer base for Hong Kong's financial services industry
as it instantly expands the catchment area by more than 10 times. Asset managers can
leverage opportunities in product origination and develop fund products in Hong Kong to tap
into the Mainland investor base. Banks can base their sales and distribution operations in
Hong Kong to reach out to Mainland customers. Other parts of the financial services value
chain, such as professional and support services firms, will also benefit. For global financial
institutions, the beauty of the scheme is that they can serve Mainland investors while staying
in Hong Kong in an efficient manner, without setting up a presence in the Mainland, obtaining
licenses or adapting to a new regulatory environment.
14. Since the launch of WMC services on 19 October, the scheme has been well received and
operations have been smooth, with many banks having strengthened their frontline and
wealth management staff to support the scheme. In the first month of launch, more than
13,000 individual investors participated in the scheme (including Hong Kong and Macao) and
more than 3,600 transactions were successfully completed, with total cross-boundary
remittances amounting to over RMB 260 million.
15. We are encouraged by the initial market response of the two schemes so far and recognise
that these new initiatives will take time to develop as investors familiarise themselves with
the new investment channels and navigate the product landscape and macro environment.
For WMC in particular, considering that it will be many investors' first attempt at conducting
cross-boundary investments, it is important to ensure that adequate investor education and
investor protection is in place to build up their confidence and user experience in using the
scheme. We have been actively stepping up the investor education work together with the
industry through various programmes and have established sound mechanisms for
regulatory cooperation and enforcement to protect the rights and interest of investors.
16. We are fully aware of the industry's requests for expanding the scope of eligible investors
and investable products further down the road. The experience of other Connect schemes
has shown that a prudent start with proper risk controls will provide a solid foundation for the
robust and healthy development of the new members of the Connect family. This is why
the scheme parameters such as the product scope, quota management and sales
arrangement under WMC, and scope of eligible investors and market makers for
Southbound Trading, lean on the side of caution at first, leaving room for refinements and
expansion in the future. After all, the schemes involve different regulatory regimes and
require close collaboration with our Mainland counterparts in order to find common ground
and policy space within our respective regulatory regimes and practices. For example, the
account opening arrangements under WMC has been a topic of interest for both the industry
and investors. As a near-term priority, we are exploring with Mainland regulatory authorities
on expanding an arrangement for account opening by attestation under the Northbound
scheme. Based on the feedback from the Mainland regulator, we expect that the
arrangement will be implemented on a pilot basis and introduced in an incremental manner.
When the scheme has bedded down smoothly, we will definitely take into account the
industry's views and requests in considering the future development of the scheme in
conjunction with the Mainland regulators.
17. China's economic growth and wealth generation, as well as global investors' increasing
appetite for RMB-denominated assets, all point towards a bigger role for Hong Kong. Given
that our city is well placed at the intersection point of the Dual Circulations depicted in the
th
National 14 5-year new development strategy, we are confident that it can play an
instrumental role in intermediating the financial flows between the Mainland and the rest of
the world for decades to come. At the HKMA, we are continuously working towards new
policy breakthroughs that can strengthen Hong Kong's franchise. The industry's active
participation is crucial in this process. Thanks to the questions and suggestions put forward
by the industry, we were able to conceptualise possible implementation scenarios and
introduce market-oriented enhancements for our various Connect schemes. I warmly
welcome your views and ideas on ways to further develop the role of Hong Kong markets in
enhancing the efficacy of these various Connect schemes and speeding up the process of
internationalisation of RMB.
18. Thank you very much and I wish you an enjoyable and rewarding conference.