(Bloomberg Opinion) — Shortly after Hong Kong narrowly overtook Switzerland as the world’s largest offshore wealth management hub, the sustainability of this business is already being called into question.
The seismic event is China’s recent crackdown on cross-border stock trading. Steep penalties aside, Beijing has asked three online brokers, the biggest of which is based in Hong Kong, to liquidate all existing accounts held by mainland Chinese within two years. In a concurrent move, the city’s securities watchdog put out a statement warning against poor due diligence with client onboarding and demanding close monitoring of dormant accounts.
For now, Beijing’s ire is aimed at the three retail-facing online securities firms, Futu Holdings Ltd., Up Fintech Holding Ltd.’s Tiger Brokers and Longbridge Securities Ltd. But the bigger question is whether Hong Kong’s prized private banking business will be affected, too. The move is widely interpreted as China tightening controls on capital flight from the mainland, fearing that unchecked outflows would weaken the yuan and destabilize its financial system.
Some institutions are already treading with caution. The Shanghai branch of Hong Kong-based Bank of East Asia Ltd. has suspended offshore account openings for its high-net-worth clients, reported the South China Morning Post. UBS Group AG has postponed a midyear wealth outlook event in China, while HSBC Holdings Plc is discouraging non-essential mainland travel for Hong Kong-based private bankers.
Managing money for affluent individuals is highly lucrative. At HSBC, this business can notch up a 35% return on equity, well above the company average of 17%, according to Goldman Sachs Group Inc.’s estimates. Last year, Hong Kong’s cross-border wealth rose 10.7% to $2.9 trillion, with mainland flows representing 59% of assets under management, per the Boston Consulting Group Inc.
That easy money can disappear overnight. I see at least three big hurdles.
First, China alleged that the online securities firms broke the law because they didn’t have the licenses to solicit mainland clients for cross-border stock trading. Publicly listed Futu said that it would fully cooperate with the government and is entitled to present defenses and request a hearing.
In the past, global banks’ Hong Kong-based wealth managers would travel to the mainland to socialize and deepen their relationship with clients. But discussions over account openings or specific investment products wouldn’t take place until their customers visited the financial hub themselves. Will China allow this practice to continue?
Second, can mainland clients invest overseas while being onshore? As part of the online brokerage crackdown, there’s an understanding that going forward, Chinese investors will not be allowed to transact on their apps if they’re physically present in the mainland. The government can ensure compliance by asking brokers to track down a user’s IP address and via the global positioning system, or GPS, on her phone.
If this strict interpretation is extended to global banks as well, there will be little incentive for, say, a wealthy individual living in Shanghai to keep an offshore account with them. Hong Kong banks are being urged by the city’s securities watchdog to close dormant accounts.
Third, how retroactive will China be? Futu and Tiger are being asked to liquidate all accounts held by mainland Chinese, a departure from an understanding developed three years ago from an earlier regulatory crackdown that the brokers could continue to serve existing mainland clients but were forbidden from seeking out new users.
Hong Kong’s monetary authority has instructed banks to require customers to declare that funds used in investment accounts originated outside mainland China. At Standard Chartered Plc, 30% of net new money the bank generates is from “global Chinese clients” with money already sitting offshore, according to management.
If Beijing decides to go a step further, a simple declaration form wouldn’t be sufficient. Local institutions will have to conduct thorough due diligence themselves. It would be a time-consuming, labor-intensive compliance nightmare that will inevitably slash wealth divisions’ operating efficiency.
Hong Kong likes to portray itself as a global financial hub, but Beijing’s latest crackdown is a real stress test to that image. In the coming months, we will find out if China’s reach will extend all the way from brokers to bankers. The city’s posh private wealth managers should be worried.
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This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She is a CFA charterholder.
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