On November 25, after a more than a year of difficult time faced by Hong Kong, during which Hong Kong went through unprecedented social unrest and protests, a once-in-a-century pandemic and a tough fight again the pandemic,the Chief Executive Secretary of Hong Kong, Carrie lam issued a new policy, involving nearly 200 items of new measures, of which the public has certain expectations In this stormy economic environment, all industries are facing different difficulties and challenges. As a leader in the financial industry, we can no longer rely on past thinking and expect to maintain our status as an international financial center. The core value of the rapid development of Hong Kong's financial status in the past lies in the special role that it played in the world, as a gateway of China to the outside world, and its rules of law and refined and free system. With China's rapid development and opening up to the outside world, of course, Hong Kong has played an important role, but it still feels that this special status is slowly declining in its importance. Shanghai and Shenzhen have emerged as domestic financial centres to compete with and complement Hong Kong, but each offers different and unique functions. The Hong Kong Government also recognises that, in addition to its core competitive values, it is important to capitalise on the momentum of China's opening up and turn its role as a gateway into a bridge to Mainland, where it can also take advantage of the vast market opportunities.
The new policy address made the following points to strengthen Hong Kong as a financial centre, including further liberalisation of the mutual access mechanism, measures to promote the development of private equity and family office business, and the promotion and reform of the Hong Kong real estate trust fund mechanism.
Mutual access between the Mainland and Hong Kong, open up, explore and expand the financial road
Further opening up the mutual access mechanism and the list of traded securities. Since its opening in November 2014, the mutual access mechanism has developed steadily and matured at the present stage. Domestic and foreign investors are satisfied with the operation of the mechanism and the progress of expanding the list of tradable securities. The latest round of reforms will allow Hong Kong-listed Class B shares, or companies with no profits or revenues, to be included in the Hong Kong Stock Connect list, subject to certain conditions.
On the other hand, Shanghai science and technology version of the shares can also be included in the Shanghai Stock Connect list under suitable conditions. Type B shares are generally biotech shares listed in Hong Kong, as most of the drugs or products are in the clinical stage and the development space is based on the popularity or application of the products when they are launched. These shares are generally seen as risky but also have plenty of room for growth. The shares listed in Shanghai are also considered to be high-growth types of shares. The inclusion of both on the list will provide more options for investors, thus increasing the volume of transactions between the two interconnection. One shortcoming of this reform is that it does not include shares that are listed in Hong Kong for the second time, such as Alibaba, NetEase and Yum China. Moreover, HKEx has high hopes that the return of the concept shares to the secondary listing in Hong Kong will become a major trend in the coming period of time. If these shares are not included in the Hong Kong Stock Connect list, then the effectiveness of this policy is weakened.
The inclusion of secondary listed companies is a matter of time
First of all, let's consider the reasons and thoughts behind not including second-listed companies in the Hong Kong Stock Connect in spite of the high demand. In my opinion, the second listed companies in Hong Kong are chinese companies already listed in the U.S. Although Trump will leave office soon, the relationship and policies between the U.S. and China are still unclear, and it is unknown whether Biden will relax the policies for the companies listed in the U.S. after he comes into the scene. The Trump administration's earlier request to the U.S. Securities and Exchange Commission for accounting standards for Chinese companies listed in the U.S. has not yet changed and may threaten the status of certain companies listed in the U.S. Moreover, the list of sanctions imposed by the U.S. government on Chinese companies is now so varied that the external influences on these companies listed in the U.S. have increased. It would be irresponsible to allow mainland investors to trade under such uncertainties. If these companies are really included in the list, and if there is material negative news that causes the stock price to plummet, it will be a bit of a "trap" for investors, which is really detrimental to Hong Kong's status as an international financial center, so not including them in the list at this stage is really well-intentioned.
Actively explore other paths
Cooperating with the Greater Bay Area Wealth Management Connect announced earlier, we can see from the policy that there is an intention to accelerate the front office function of Hong Kong. The success of the mutual access, which now accounts for a large proportion of Hong Kong stock market transactions, and the increasing number of local, mainland and foreign investors conducting transactions through this channel, will expand the scope of other sectors, customers, and regions, which will greatly enhance the breadth and depth of Hong Kong's financial sector. We are now waiting for more details to come out, which is what the financial industry and wealth management related practitioners are looking forward to. At present, it depends on the government's timetable for the implementation of various mutual access. Previous experience in the implementation is relatively quick. If all areas are opened, this unique financial position is comparable to that of few in the world.
Family offices are the new standard in wealth management
The other thing that we have been focusing on is the regulation and development of family offices and private equity funds to enhance our status as a financial center. In the past, the general public felt that only billionaires and above were qualified to talk about establishing family offices. Now, with the rise of Multi Family Office and the increasing wealth of the middle class, the demand for family offices is keen. In the past year, the Hong Kong Securities and Futures Commission (“SFC”) issued guidelines on the regulation and licensing of private equity funds and family offices respectively, with the aim of improving and standardizing this industry. Hong Kong has an abundance of financial talents, and over the past few decades, professionals in banking, wealth management, private banking and wealthy clients have built up certain relationships. Now the concept of wealth management and family succession is combined into a more professional and extensive management, and this is not something that other cities can compete with Hong Kong in this area. Because of this, the development of this industry to enhance the international financial status and to make Hong Kong the Zurich of the East is another competitive advantage that demonstrates Hong Kong's unique position as a financial center. The Hong Kong government is moving in the right direction, but perhaps not hard enough. The establishment of Invest Hong Kong to promote Hong Kong's competitive advantage in family offices and some tax incentives will indeed enhance the development of the industry, but on the other hand, it is more important to strengthen the regulation to prevent the occurrence of confusion and black sheep effect, which will damage the image of the SFC and other regulatory bodies to continue to gate-keep with world-class standards. It is encouraging to see that the policy address has begun to promote and enhance this business.
The importance of real estate trusts
Finally, the policy address also mentioned making Hong Kong a hub for real estate trust funds in Asia. At present, the listed real estate trust funds in Hong Kong are mainly properties in Hong Kong, and some of them also have the concept of real estate trust assets in the mainland, but number of them are very few and can be counted on one hand. Because of Hong Kong's geography, it is not easy to develop this industry. But if you include assets related to the mainland or elsewhere in the region, it is not difficult to leverage the experience and ability of Hong Kong's financial markets to make real estate trust funds flourish. Hong Kong has made several adjustments in this regard over the past few years. First, including the relaxation of the MPFA to expand the proportion of MPF investable housing trust funds and the number of funds in the market, it will provide more stable return assets, which will help to increase the market for housing trust funds. Second, the Securities and Exchange Commission may relax investment restrictions on real estate trusts and allow investment in minority interest properties and projects under development to expand the range of investment targets for real estate trust companies. Third, at present, the government clearly requires the development of this project, and other policies can surely increase the speed of development. Property trusts have always been a weak link among Hong Kong's listed companies, and strengthening the sector would add depth to the city's capital market.
This policy is also in line with the mainland's reform and development of the real estate trust fund. At present, the Mainland has begun to package and list some infrastructure projects in the form of real estate trusts. If implemented, this will greatly increase the types and number of real estate trust funds. Some projects can be listed directly in Hong Kong, and when the number starts to increase, the whole industry will slowly flourish. Hong Kong's current property trust requirements include debt ratios and dividend payout ratios that would then meet world standards, which is why property trust funds are regarded as instruments of stable investment returns. We hope that while promoting the development of this sector, regulators should also keep the premise of protecting the safety of investors, and bring high-quality real estate trust assets from China or overseas to Hong Kong for listing.
Wong, Jackson Chi Yeung
Director, Amber Hill Capital Limited
He is currently a director of Amber Hill Capital Limited, responsible for asset management business. He has worked at Fullerton Boston, Securities International Securities and Huarong Financial Holdings Limited. He has over 20 years of experience in the financial industry in the United States and Hong Kong. He has been a guest of many financial media, including TVB, CNBC Asia, Bloomberg TV, and has been interviewed by Associated Press, Agence France-Presse, and Reuters.
Amber Hill Group is a fast-growing global investment firm dedicated to providing personal financial planning to high net worth clients around the world. The core quantitative trading systems created by the Group have performed well, and the assets under management of the Group's subsidiaries and affiliated companies exceed US $1,000,000,000.
