The Greater Bay Area: are the connect schemes really working?
The latest survey from the global accounting body CPA Australia presents a bright picture of the future Guangdong-Hong Kong-Macao Greater Bay Area.
Over the next five years, expectations are high for two-thirds of the 500 accounting, finance professionals and policymakers interviewed for its survey Seizing Success and Connectivity in the GBA: Financial Services.
According to the survey released on Thursday (September 22), within this decade GBA corporate investment will grow, there will be more active green finance and carbon trading activity, there will be more efforts to improve capital flow openness, digital payment technology adoption will enhance connectivity, there will be more resources for talent availability and there will be closer collaboration among authorities.
“Regulators have endeavoured to establish an ecosystem in Hong Kong to guide and support companies towards the path of a low-carbon and sustainable transition,” said Eden Wong, CPA Australia President of the 2022 Greater China Divisional Council.
“They have set a strategic framework and agenda for green and sustainable finance and published guidance on sustainability-related disclosures.
“Hong Kong may play a role as a super connector to link China’s carbon trading scheme with the rest of the world and set the GBA on a fast track to improve the quality and efficiency of green and sustainable finance. We suggest the authorities across the GBA cities explore the possibility of establishing a unified carbon trading market to serve both domestic and international investors.”
More than one-third of respondents said the openness of capital flow was a key advantage for businesses operating in the GBA. “Cross-border capital flow continues to grow and the use of the Renminbi in global transactions is increasing,” Wong said.
Despite these hopes (and the CPA says there was $415 billion in 2021 from high net worth individuals in the GBA waiting to be harnessed) some analysts are saying that the reality is falling short - particularly in terms of new connect schemes which they say are stacked in favour of mainland China.
One Hong Kong-based business consultant that spoke with AsianInvestor said that while the Stock Connect and Bond Connect schemes were working “extremely” well, other newer schemes such as ETF Connect and Wealth Management Connect were leaving investors frustrated.
“Mutual recognition of funds been around for six years and Wealth Connect just 12 months and most recently ETF Connect, but they’re just not working and the odds are stacked against HK,” he said.
In terms of Wealth Connect he said the idea was to enable cross-border residence within the GBA to allow free movement of products.
“Very obviously the restriction on travel and quarantine requirements - basically closing the borders - has had a massive impact,” he said. “In this type of business area, face to face communication is essential.
Other aspects of Wealth Management Connect – including the risk rating maximum of R3 – would tend to exclude China funds in Hong Kong which often have a rating of R4 or R5 whereas equivalent funds on the mainland would be regarded as an R3 and would be covered by the scheme.
“It’s illogical in the circumstance,” he said, adding that restrictions on who can participate needed to be broadened.
“Private banks, wealth managers and insurance companies, these are areas in phase we would have hoped would have been opened up,” he said. “As we have seen with mutual recognition of funds, phase 1 was criticised after it was launched for being too restrictive – six years later and we still don’t have phase 2.”
He said that while Stock and Bond Connect had been well received by regulators, mutual recognition of funds and Wealth Management Connect are not schemes set to benefit Hong Kong companies and that various impediments were preventing a proper cross-border exchange.
“With the ETF Connect there are 83 mainland ETFs and four Hong Kong ETFs, but so far in terms of sales, the HK ETFs have outsold the mainland ETFs by 10 times,” he said. “Part of this comes down to the fact that within the 83 mainland ETFs I doubt there is even one that is set up to encourage cross border sales.
“I doubt there's any English literature on them, there’s track record of performance information or even their name in English. How could people in HK even understand their product?”
He added that Chinese regulators were in a constant state of transition, taking the long-term view that the schemes will change over time. “But in the commercial world of business, you want things to happen immediately.”
WORK IN PROGRESS
Eden Wong told AsianInvestor at the survey press conference that the connect schemes were still very much a work in progress.
“I think the Stock Connect scheme has achieved a lot over the past few years. Despite market volatility we have seen a pretty steady increase in volume in both northbound and southbound trade over the past few years,” he said.
“I think the scheme has opened up a wide variety and a broad range of securities and investment products for both offshore and onshore investors
“As always we believe there will be room for improvements and in this regard we have recently implemented the Swap Connect which will further allow investors to hedge against exposure in investments in both the onshore and offshore market.”