New routes to access China's capital markets


John Chan, Financial Services Tax Partner, and Josephine Kwan CPA (practising), Asset & Wealth Management Partner, PwC Hong Kong, on how the Wealth Management Connect will further boost Hong Kong’s position as an investment hub

The pace of reform is accelerating in the opening up of Mainland China's capital markets to international investors. Starting with the Qualified Foreign Institutional Investor (QFII) programme in 2002, this raft of reforms has led to Stock Connect in 2014 and Bond Connect in 2017. Early this month, we started to see details of the much-anticipated Wealth Management Connect (WMC). 

This latest chapter in capital markets reform builds on previous measures and reflects growing confidence on the part of regulators and market participants in managing inbound and outbound flows. It is also highly significant that this is the first reform to be designed specifically around the Greater Bay Area (GBA).

While previous connect schemes linked Hong Kong with Shanghai and Shenzhen (as well as London with Shanghai), WMC brings together the monetary authorities of Hong Kong and Macau with the Shenzhen and Guangzhou bureaus of the principal Mainland regulators such as the People’s Bank of China, China Banking and Insurance Regulatory Commission, China Securities Regulatory Commission and the State Administration of Foreign Exchange. This makes it one of the most tangible signs of the GBA’s transition into a real, integrated market for both domestic and international investors.

The initial aggregate quotas for WMC are expected to be 150 billion yuan (US$23.3 billion) for both northbound and southbound legs. By contrast, the Hong Kong-Shanghai Stock Connect has daily quotas of 52 billion yuan (US$8 billion) (northbound) and 42 billion yuan (US$6.5 billion) (southbound). The maximum individual investment quota for the new scheme is 1 million yuan, and there are various measures to regulate investor eligibility. The experience of the QFII and RMB QFII programmes and other connect schemes suggests that quotas may grow over time – possibly with daily or monthly quota limits to manage capital flows.

While WMC will certainly boost financial services in the GBA, there is still some work to be done to support the growth of cross-border collaboration. For example, we have to see any discussion on tax, which is a key cost and compliance element, especially in the context of a large cross-border operation. Bringing tax to the table would provide more certainty and encourage businesses to expand their operations in the GBA. 

As our colleague Rex Ho CPA, Asset & Wealth Management Tax Leader, PwC Hong Kong, explained in a source article of the March 2021 issue of A Plus, the WMC announcement was precedent by another milestone reform: a new carried interest tax concessions law, which was formally enacted in Hong Kong on 7 May. This reform enriches Hong Kong's asset and wealth and management ecosystem and makes it even more competitive and attractive. 

Together with the launch of Hong Kong domiciled limited partnership funds and the enhancement of the Hong Kong open-ended fund companies regime, Hong Kong is shaping up to become the regional fund domicile of choice. A proposal by a task force led by the Financial Services and the Treasury Bureau is set to introduce a re-domiciliation mechanism for existing offshore funds to re-domicile to Hong Kong in a streamlined and straightforward manner. We anticipate the legislative process will begin in mid-2021.

All these initiatives have contributed to a surge in interest and activity as Mainland China’s capital liberalization journey accelerates. With a growing crop of foreign asset and wealth managers keen to capture these opportunities, WMC offers an additional channel for financial services players to participate in the rapid growth of China, while the new fund structures and carried interest tax concession make Hong Kong an attractive base for their China expansion.

As Hong Kong and the rest of the GBA emerges from the shadow of COVID-19, these new initiatives will significantly enrich the asset and wealth management ecosystem of this market of 72 million people, offering them expanded exposure to a wider investment universe and opportunities to diversity their investments. They represent a much-needed shot in the arm for Hong Kong’s financial services as it looks to continue to play a pivotal role in China’s growth. 

“This latest chapter in capital markets reform builds on previous measures and reflects growing confidence on the part of regulators and market participants in managing inbound and outbound flows.”