23 October 2016
Hong Kong is well placed to seize the opportunities from Chinese investment demand. Photo: Bloomberg
Hong Kong is well placed to seize the opportunities from Chinese investment demand. Photo: Bloomberg

Chinese investment demand: The opportunities for HK

China’s asset management industry has witnessed explosive growth over the last couple of years as regulators relaxed their grip over licenses.

The industry saw its overall assets under management (AUM) reach over 70 trillion yuan as of the first half of this year.

Of this, wealth management products sold by commercial banks reached 18 trillion yuan, compared with 1.7 trillion yuan in 2009. Meanwhile, trust funds grew to 15 trillion yuan from 3 trillion yuan in 2010, helped by their product design capability and flexibility.

Besides, mutual funds, private funds, insurance firms, brokerages and fund managers all have posted staggering growth in recent years.

However, that has posed great challenge for regulators. The asset management sector is moving toward mixed operations, but the regulators still function as separate entities.

The China Banking Regulatory Commission is the banking regulator, while the China Securities Regulatory Commission is in charge of mutual and private funds. And China Insurance Regulatory Commission is the top regulator for insurance firms.

There might be regulatory arbitrage when companies venture into different sectors.

Also, the regulators have yet to catch up with the rapidly emerging off-market financing like P2P.

The long-standing notion of “rigid payment” is still prevailing among investors. They always have the assumption that even risky investment products enjoy an implicit government guarantee or bailout by asset managers. The assumption is detrimental to long-term development of the industry.

China has maintained rapid economic growth over last several decades, and various industries have also posted robust growth. Asset managers have rarely been forced to compensate investors for defaults.

However, the central government is now becoming increasingly tolerant to company defaults that do not pose systematic financial risk. The shift in stance comes in the wake of pressures brought about by the economic slowdown.

Default cases have been on the rise in recent years. The non-performing loan ratio of Chinese banks has soared to 1.59 percent in the third quarter of this year from 0.9 percent in 2011, according to data from CBRC.

Given the current situation, asset managers should outline explicitly the potential risk on their products, and offer lower return on some funds.

China’s asset management industry still has low penetration despite its staggering size. More than 55 percent of the wealth of Chinese households was parked in bank deposits last year, according to research from Boston Consulting Group.

The asset management sector has great growth potential as the rich will seek to allocate more money to investment products.

Meanwhile, Chinese companies are increasingly active in outbound investment. China’s outbound investment reached US$123.1 billion in 2014, exceeding the inbound investment for the first time. The country has become a net capital exporter, and the Ministry of Commerce expects outbound investment to grow at more than 10 percent in the coming years.

Hong Kong has many advantages in capturing China’s outbound investment boom.

First, the city has the best talent pool as it is home to a number of the world’s leading professional services firms and asset managers. 

Second, Hong Kong’s legal system will help in resolving cross-border lawsuits and litigations. That will be of help for Chinese companies who engage in overseas mergers and acquisitions.

Third, the city is recognized as a leading financial hub, enabling Chinese companies to raise funds through public listings. It’s also the world’s largest offshore renminbi market.

Hong Kong has convenient and efficient transport and communication links with mainland China and other parts of the world.

More importantly, Beijing has shown reliable support for Hong Kong, which has been considered as the first choice for pilot financial policies. Regulators on both sides have accumulated experience through the Shanghai-Hong Kong Stock Connect, QFII and mutual fund recognition programs.

To fully tap China’s growing cross-border investment demand and seize the opportunities, Hong Kong should think and move proactively.

This article was contributed by Chen Shuang, chief executive of China Everbright Ltd., and published in the Hong Kong Economic Journal on Dec. 16.

Translation by Julie Zhu

[Chinese version中文版]

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