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The Guangdong-Hong Kong-Macao Greater Bay Area (GBA) is one of the regions with the highest degree of openness and economic vitality in China. Only by further strengthening regional financial integration and building an integrated financial system and infrastructure, the allocation of resources can be optimized, and the ability of the GBA to provide financial services to the real economy can be enhanced.
In brief
- Analyzes the advantages of the Shanghai-Shenzhen-Hong Kong Stock Connect, ETF Connect, Swap Connect and the Wealth Management Connect.
- Implications of this series of connectivity programs to the financial industry in the GBA and explores the role of Hong Kong in the development of the GBA.
- Financial integration of the GBA in the future worth promoting.
The GBA has well-established financial infrastructures and a vibrant information technology industry. The area has also prepared resources and conditions for the development of digital RMB. The 14th Five-Year Plan and the outline of the vision for 2035 have included the development of digital currency.
The digital RMB pilot sites in the GBA are conducive to promoting the orderly flow of cross-border capital and the free convertibility of RMB. They explore the scenarios for the use of digital RMB, and bring revolutionary changes and opportunities for the financial service industry in the region. At the same time, the development of digital RMB requires an innovative system within the framework of the relevant guidelines of the People’s Bank of China. Digital technology for financial services can help promote the development of the real economy. In developing digital RMB, attention should be paid to the impact of changes in the structure of financial market on the regulatory and legal framework, and the formation of a regulatory system and regulatory model for innovative digital financial products.
1
Chapter 1
The connectivity programs for the GBA
Including Shanghai-Shenzhen-Hong Kong Stock Connect, ETF Connect, Swap Connect and the Wealth Management Connect.
Shanghai-Shenzhen-Hong Kong Stock Connect1
As the main channel for mainland investors to invest directly in the Hong Kong market and international investors to invest in the mainland A-share market, the Shanghai-Shenzhen-Hong Kong Stock Connect has been running smoothly and steadily, while the transaction is becoming more and more dynamic.
The advantages of Shanghai-Shenzhen-Hong Kong Stock Connect are mainly reflected in the following aspects1:
1. The convenience of investment
The Shanghai-Shenzhen-Hong Kong Stock Connect mechanism allows investors to invest in a way they are familiar with. Mainland investors can use their A-share accounts to buy and sell Hong Kong stocks online, and international investors can use their Hong Kong stock accounts directly to trade A-shares, without the need to go to the mainland to open an account.
2. The capacity expansion of investment target
Investors in both places can participate in trading more targets, and the variety of products available for investment is also growing.
3. The continuous optimization of investment mechanism
The Shanghai-Shenzhen-Hong Kong Stock Connect mechanism is continuously optimized in a better and more convenient way, such as the optimization of the quota of the Shanghai-Shenzhen-Hong Kong Stock Connect, the provision of a special separate account for centralized management service (Master SPSA) to facilitate the participation of international funds in the northbound access, the Shanghai-Shenzhen-Hong Kong Stock Connect settlement acceleration platform (Synapse) has been specially designed for international institutional investors.
ETF Connect and Swap Connect1
ETF Connect and Swap Connect, a series of interconnection schemes that further enhance the integration of the mainland and Hong Kong capital markets, enables ETF to diversify their cross-border asset allocation easily.
ETF has a short history of development in both the mainland and Hong Kong markets. However, both ETF markets have experienced rapid development in the past few years and have their own unique product ecologies. According to the current inclusion criteria, the number of Hong Kong ETFs included initially is indeed small, but with the interoperability of the ETF markets in the mainland and Hong Kong, issuers of the two places can learn from each other’s market development experience and accelerate development together. In the long run, the number of ETF products meeting the inclusion criteria will increase gradually, especially with the increase of cross-border liquidity, and the ETF products in both markets will increase accordingly.
Wealth Management Connect
Since the release of the Opinions on Financial Support for the Construction of the Guangdong-Hong Kong-Macao Greater Bay Area (hereinafter referred to as “the Opinions”), the Wealth Management Connect Scheme (WMC) business pilot has been gradually launched. WMC has enriched the choices of the personal investment, making it a more convenient way for the Guangdong, Hong Kong and Macau residents, and strengthening the two-way flow of cross-border RMB funds.
After the channels of Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect, Bond Connect and Mutual Fund Recognition, new capital circulation channels have been increased by the cross-border flow of RMB capital. Those connects are all positive in promoting a dynamic balance between RMB outward and return flows. The WMC can effectively improve the efficiency of cross-border capital flow supervision by establishing a transparent and efficient financial supervision system and risk control mechanism.
Total of
individual investors in the GBA participated in the WMC
Amounting
from 11,000 WMC fund transfers
*Source: Latest data released by the Guangzhou Branch of the People’s Bank of China, as of 31 May 2022
Relying on the successful practice of interconnection in the stock and bond markets, the WMC extends financial market liberalization to bank wealth management products with wider customer coverage, demonstrating that China has a clear policy direction to continue promoting financial market liberalization and providing new incentives for domestic and overseas financial institutions to participate in China’s wealth management market and asset management sector.
The implementation of the WMC is both an opportunity and a challenge for financial institutions in Guangdong, Hong Kong and Macau:
- The rapid accumulation of urban wealth in the GBA has expanded the source of clients for the asset management market in Hong Kong and Macau, and the further integration of the financial markets in the three places of the GBA will also bring new development opportunities for financial institutions in Hong Kong and Macau. Banks and asset management industries in Hong Kong and Macau should start from the following aspects to actively respond to the challenges of entering the new market.
- Cooperation between mainland banks, Hong Kong banks and financial institutions in cross-border wealth management can expand the existing scope of wealth management business of mainland banks. An increase in the number of participants in the asset management industry places higher demands on mainland banks’ channel sales, customer service, product innovation and management capabilities.
Hong Kong is a globally recognized international financial center and continues to hold the
place in the 2021 Global Financial Centers Index (GFCI)
Hong Kong’s stock market was ranked fourth in Asia and seventh in the world, with a total market capitalization of
by the end of 2021
Hong Kong is the fourth largest initial public offering (IPO) market in the world, with over
in IPO capital raised in 2021
Hong Kong is the world’s largest offshore RMB business center, accounting for more than
of global offshore RMB payments
2
Chapter 2
The active role of Hong Kong in the development of the GBA
How does reforming the mainland capital market strengthen Hong Kong's position as an international financial center?
Hong Kong can leverage its leading edge to facilitate efficient capital flows to serve the real economy, while playing its key role in building an international network with depth, breadth and resilience in the RMB internationalization process.
Green and sustainable finance, which is actively promoted in the GBA, is a rapidly developing and emerging financial sector. To explore the huge green infrastructure investment opportunities in the GBA, all sectors need to work together. Hong Kong with its mature capital markets and vast green investment channels and opportunities, may develop into a leading green financial center in the GBA.
As the country’s long-term economic development prospect is positive and the RMB steadily advances in internationalization, the RMB’s role in international payments, investment and reserves will continue to enhance in the future, and it will be widely used in trade settlement, cross-border investment and global foreign exchange reserves.
Since Hong Kong is the global hub for offshore RMB business and has internationally aligned financial infrastructures, it can play an irreplaceable and critical role in the internationalization of RMB by efficiently supporting cross-border RMB payments and settlements. At the same time, by opening more investment products in the mainland and Hong Kong to the residents of the GBA, further relaxing the pilot projects in the GBA, and expanding the cross-border use and financing of RMB, the pace of internationalization of RMB will be escalated. The reform of the mainland capital market can also be enhanced and Hong Kong’s position as an international financial center can be strengthened.
3
Chapter 3
The GBA financial integration development path and future prospects
Areas worth focusing on.
In the future, we believe that the key to promote the financial integration and development of the GBA is the implementation of the blueprint proposed in the Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area and the Opinions into the financial infrastructure, financial institutions, financial markets and financial products from the operational aspects. It is believed that the following aspects are worthy of attention:
- Further exploring the use of Digital Currency Electronic Payment; promoting supporting legal systems and regulatory mechanism; further promoting cross-border trade, investment and financing facilitation in the GBA
- Improving the construction of information security, taxation and other systems related to cross-border wealth management; promoting the facilitation of individual investment and the two-way circulation channels of cross-border RMB funds; gradually allowing a free flow of funds
- Accelerating the interconnection of financial markets and financial infrastructure in Guangdong, Hong Kong and Macau; strengthening the connectivity of financial supervision, payment, clearing, custody, legal and accounting intermediary services in Guangdong, Hong Kong and Macau; enhancing the level of cross-border professional services in the GBA
- Combining financial innovation with the application of high-tech achievements; strengthening the level of financial services for scientific and technological innovation
- Reinforcing financial supervision cooperation between Guangdong, Hong Kong and Macau; establishing and improving financial risk warning, prevention and resolution systems which will effectively prevent cross-border financial risks
Summary
The financial integration of the GBA cannot be achieved in one day. It is necessary to learn from the effective international models under the premise of combining our own characteristics. At the same time, it is important to strengthen the integration of financial infrastructure in the GBA and combine financial innovation with the application of high-tech achievements in promoting financial interconnection in the region. The role of the GBA in the international development of the financial industry is worth looking forward to.
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