Hong Kong leader Carrie Lam’s 2020 Policy Address underlined the territory’s increasingly singular vision to deepen the integration of its markets with those of the mainland and better tap into growing wealth in southern China.
After a postponement of more than a month, Lam finally delivered the address on Wednesday (November 25). It was her longest to date, and it highlighted several financial market initiatives including relaxing restrictions for the listing of real estate investment trusts (Reits), boosting family office development and establishing a wealth management connect scheme between Hong Kong and the Greater Bay Area.
The speech's broad brushstrokes were of a city seeking to better service investment flows from China's economy, a priority that surprised few given the Lam administration's increasing efforts to hew public policy closer to the country, even at the cost of tarnishing its image for political impartiality.
While plans to expand Reits piqued the interest of some, other investors felt there was little to get excited about. A Hong Kong-based senior investment executive at an international life insurer felt that Lam’s speech was a bit of a non-event for his organisation.
“Nothing major was announced on the investment side despite the length [of the speech],” he said, adding the market had expected the chief executive to discuss details regarding the expansion of the existing Stock Connect scheme.
In particular, investors were looking for clarification regarding the inclusion of firms with secondary listings in Hong Kong or which have two classes of shares carrying different voting rights, such as Alibaba Group and JD.com.
Stock Connect links mainland’s stock markets with the Hong Kong Stock Exchange, and allows mainland investors to buy shares listed in Hong Kong via the Shenzhen and Shanghai bourses. It is also one way for international investors to trade mainland shares, via Hong Kong.
In her address, Lam said that Hong Kong-listed biotech companies that had yet to make a profit would be included in Stock Connect, as would some stocks listed on the mainland’s Sci-Tech Innovation Board. She did not elaborate further on the possible inclusion of secondary listings into the scheme.
Sally Wong, chief executive of Hong Kong Investment Funds Association, was more optimistic, telling AsianInvestor that the initiatives mentioned in the address would help to underpin and further deepen the mutual access between the mainland and Hong Kong financial markets, improving the growth of both.
REAL ESTATE INVESTMENT TRUSTS
One area of more concrete plans for reform was Reits.
Lam specifically mention that the city aims to promote the listed real estate investment vehicles, to strengthen its capital raising functions and broaden investment options for investors seeking stable returns. That offered a sign the city is looking to raise its game in an investment instrument that has so far been taken more seriously by rival financial centre Singapore.
“The proposed measure will promote Reits' diversification in Hong Kong, and we are likely to see more Reits listed in the future. The awareness of such products will be also lifted, hopefully to the level of mature Reit markets such as Japan, Australia and Singapore,” Alex Yang, vice president of institutional solutions at Samsung Asset Management (Hong Kong), told AsianInvestor.
“Hong Kong’s Reits have a limited scope of underlying assets, mainly focusing on retail, hotel and office," he said. "Take Japan and Singapore for instance, Japan has a longer history of Reit development and a relative sizeable market cap, and it also has more diversified underlying assets. In Singapore, the country has Reits that invest in hospitals and logistics centres as well.”
Given the low-yield environment, attractive valuations and dividend payouts, Reits appeal to both long and short-term investors, Yang added.
TARGETING WEALTH MANAGEMENT
In addition, Lam said her government would be expediting the implementation of the cross-border wealth management scheme, as it sought to better tap into the growing wealth in the Greater Bay area.
The scheme was initially proposed in June this year. Eddie Yue, chief executive of Hong Kong Monetary Authority (HKMA), said in the announcement at that time that “the two-way cross-boundary connect marks another important milestone for the mainland’s capital account liberalisation after the Stock Connect and Bond Connect schemes and aims to roll out the programme as soon as practicable".
However, Wong at the HKIFA said the scheme might take some time to fully deploy.
“We have been working closely with the regulators in the past few months on the scheme, several aspects such as the money flow channel, operational capabilities, products to be provided and also the quota of certain products had been discussed,” she told AsianInvestor.
A source close to the scheme, who declined to be named, added that there might be around 200 to 300 investment products to be initially launched for mainland investors.
Wong believes that both sides will initially offer low to medium risk products as the regulator wants to take a prudent approach to protect investors’ interests.
“Like other connect scheme between mainland and Hong Kong, the wealth management connect scheme may take some time to be fully accessible for investors, but it is a convenient way for mainland Chinese to add offshore asset classes to their current portfolios," she said.
The desire to attract more Chinese wealth into the city will, if successful, also necessitate an increased need for private wealth management.
Lam pointed out that in order to further promote the family office business, Invest Hong Kong, the department responsible for foreign direct investment, will set up a dedicated team to promote the benefits of using Hong Kong a one-stop support service base for family offices.
Jessica Cutrera, partner at The Capital Company, a $1.1 billion asset manager focusing on family offices, welcomed the move. She told AsianInvestor that Hong Kong is still one of the best places for investors who are looking for a well-regulated high-transparency market, and the gateway could also attract western family offices as their first step for investing into Asia.
Still, some industry participants are sanguine about the possibilities. One is Kwan Chi-Man, chief executive and founder of Raffles Family Office. He and other independent wealth advisers launched The Family Office Association Hong Kong on November 18, and claim it is the first independent body of its kind focusing on family office development.
However, Hong Kong will have to battle the perception that it has become increasingly under the direct purview of Beijing, a fact that has already led to some wealthy individuals to shift capital to Singapore, with more likely to take place. It has also encouraged other regional cities to try and attract more wealth from Hong Kong.
Slowing or reversing these will require Lam's government and regulators to demonstrate they remain dedicated to ensuring the impartial implementation and enforcement of financial rules, and won't be successfully influenced by China.
Kwan told AsianInvestor in a written reply that Hong Kong continues to serve as a gateway between the world and China, a country whose ultra-wealthy families are still heavily under-served.
“Many of these families have come to rely on Hong Kong as a conduit to diversify their investments beyond renminbi assets. At the same time, Hong Kong is a leading global finance hub and home to a wealth of finance sector talent and one of the world’s largest stock exchanges,” he noted.
In 2019, the Asia Pacific's HNWI population and wealth climbed by 7.6% and 7.9% respectively to $6.5 trillion and $22.2 trillion, according to World Wealth Report 2020 published by Capgemini.