Hong Kong: A strategic hub 
for growth in asset management

Resilience amid uncertainty

Hong Kong’s resilience as one of the world’s leading asset management hubs was re-demonstrated as the city’s fund industry prospered amid uncertainty across the border and weakened market conditions across the world.

Inflows to funds hosted in the city grew and its wealth management business expanded through the middle of last year, solidifying Hong Kong as the place where the world’s investors go to take advantage not only of its domestic riches, but also those of southern China.

Asset and wealth managers had to contend with rising global inflation, volatile markets, an uncertain interest rate environment, and increasing geopolitical tensions. That also combined with a slowing Chinese economy made worse by structural challenges within Mainland China’s property market, which provides the lion share of ordinary Chinese investors’ wealth.

Nevertheless, the industry still managed to lure net inflows of more than HK$87 billion ($11.1bn) in 2023 — almost double the value of the previous year — through the Stock Connect channel. In the final three months of the year

alone, net inflows climbed 179% to HK$33.5 billion. While poor market conditions meant that the total industry in Hong Kong shrank a little in 2022, the SFC said that total assets under management in the city’s 914 funds jumped 4.9% to HK$1.4 trillion last year.

On the Stock Exchange of Hong Kong, too, the data is healthy. The number of Exchange Traded Funds listed on the bourse in 2023 grew to 149 and turnover hit a record HK$11.8bn, up 20% year-on-year.

“Against this backdrop, investors are facing unprecedented challenges and opportunities,” Melody He, Deputy Chief Executive of CSOP Asset Management told a panel of industry leaders at the annual Offshore China Fund Awards, organized by the Chinese Asset Management Association of Hong Kong (HKCAMA) and Bloomberg.

Private wealth alone is estimated to have seen a very strong 2023. Hong Kong’s Secretary for Financial Services and the Treasury, Christopher Hui, said the city’s wealth management business is expected to grow 7.6% between 2022 and 2027 and noted that it notched up net inflows of HK$87 billion in 2023 — a year-on-year increase of 93%.

 

 

 

 

 

Bloomberg estimates also paint a healthy picture. Wealth inflows probably rose fourfold and private assets under management will reach as much as HK$12.4 trillion by 2025, according to Bloomberg Intelligence research. Half of current wealth under management derives from regional investors and that is set to increase, Bloomberg research estimates.

Hui said that Hong Kong planned to further boost the wealth industry by attracting more wealthy investors to the city through a combination of family office expansion a wider talent admissions visa scheme, new tax incentives, the creation of new products and increased investment quotas, among other measures.

 

 

“Hong Kong is a thriving ecosystem for the family office industry and the future growth is promising,” he said, adding that there are now more than 2,700 family offices in the city. “Hong Kong’s asset and wealth management industry is firmly rooted.”

The story of an industry maintaining its strength during tough times is one that was made abundantly clear by HKCAMA Chairperson Doris Lian. She told the panel that the industry had taken its message of Hong Kong and China’s can-do financial expertise and deep pockets to the world. The city’s asset and wealth management industry had HK$30.5 trillion under management, 12 times the size of Hong Kong’s total GDP, she said. Greater Bay Area asset managers had also capitalized on the benefits brought by China’s Belt and Road overseas development initiative and the Regional Economic Comprehensive Partnership, a pan-national trade agreement that includes China.

“On the one hand, member firms have fully utilized Hong Kong’s locational advantages,” Lian said. “And on the other, with the support of the Chinese government and the deepening of cross-boundary access, we have been utilizing the two markets to inject new vitality into Hong Kong’s and the Greater Bay Area’s cooperation in promoting the development of inclusive finance.”

Lian said that the city had set in place the “blueprints” by which investors were already taking advantage of the wealth locked in the GBA. The latest iteration of the cross-border Wealth Management Connect and the New Capital Investor Entry Scheme were just two vehicles that were helping to funnel capital in the region and promised to bring yet more, she said.

The work wouldn’t end there, she said, explaining that the government would increase efforts to draw in more family offices and asset owners by expanding schemes that made it easier for overseas capital and professionals to set up in the city. Among other proposed policies, the government would also look at offering tax incentives and seek to reduce transaction red tape.

“Hong Kong will continue to capitalize on the strengths of the two places, complement each other and achieve a win-win situation, promote financial co-operation with the Mainland China and the international market, enhance the competitiveness of the asset and wealth management industry, serve the development of the country, and meet the needs of global investors, so as to play a greater role in the development of international finance.”

 

The impact of virtual assets

New investment products are expected to help drive growth. One of the most topical asset classes that Hong Kong has been keen to promote is virtual assets. The Securities and Futures Commission (SFC) launched the city’s first virtual-asset exchange-traded funds in 2022 in a bid to establish Hong Kong as a hub for trade in instruments such as cryptocurrencies and the development of tokenized investment products. Its virtual asset futures ETF is the largest such instrument in Asia and regulatory authorities have begun to accept applications for virtual asset spot ETFs.

Hong Kong is keen to exploit this new and growing market, which is valued at around $3 trillion. In some cases, daily trading volume in such assets have surpassed the daily trading volume of the city’s stock exchange, explained Chao Deng, Chief Executive Officer of HashKey Capital.

SFC Executive Director for the Investment Products Division Christina Choi said she was encouraged by the industry’s exploration of tokenized retail funds and said she looked forward to the launch of a proposed spot crypto asset later in the year.

While this investment space is still developing, the city’s recent promotion of it has been encouraging, said HashKey’s Deng, identifying the blockchain technology that underpins crypto assets as a focus of particular importance. Hong Kong’s new embrace of the space has led to the return of some

proponents who left the city to find better opportunities in Singapore and other jurisdictions.

“We can clearly see institutions coming back to Hong Kong from other markets,” Deng said. “Whether it is entrepreneurs or investment institutions, or asset management and firms related to digital assets, they are obviously returning to Hong Kong.”

Artificial Intelligence (AI) is another technology that has the potential to revolutionize the funds industry. Its application, though topical thanks to its latest iteration Generative AI, is still in the balance because many questions still hang over the technology’s effectiveness and security. So far, the panel heard, AI’s application has been constrained to research. Outside of finance, AI is an attractive prospect for investors, said Kerry Zhang, Fund Manager at CSOP Asset Management.

The importance of ESG investments

Environment, social and governance (ESG) has become a huge part of the global financial system as investors seek to make their money do good for the world. While the GBA has been slower than some regions to enter the fray, its fund industry is busy putting together new products. Among them, Sun Life Asset Management (HK) Limited is creating a low-carbon fund to join the sustainability products already included within Hong Kong’s  Mandatory Provident Fund (MPF).

 

 

“If you always buy low-carbon companies through your MPF, you’re doing your bit for the environment,” Felix Ho confirmed, Sun Life Chief Investment Officer. “This is very important. It is important to pursue returns from the concept of investment, but we also need to do something for the next generation.”

The ESG space is fast-changing and its relative novelty makes it a challenging sector to embrace. There is little consensus on data reporting standards or definitions around what constitutes a sustainable product. And the glut of data that ESG produces requires sophisticated tools to incorporate it into standard investment, risk and research models.

Bloomberg has invested in the space, offering data, metrics and technology to help firms assess the sustainability of assets, products and portfolios to help managers make better-informed ESG decisions.

Uncertainty over interest rates

Investors the world over are firmly watching the Federal Reserve for any indication of its proposed rates policy. Will it continue cutting rates, as the panel forecasts? What impact is that likely to have on inflation, which had begun to decline? And what effect will it have on equities valuations, which have benefited from falling costs of borrowing?

Growth stocks, particularly in the tech sector, have gained amid rate cuts and will continue to do so even if the Fed pauses — or even reverses — them because they also benefit from the positive earnings impact from the prospects of artificial intelligence, said Sun Life’s Ho.

Sovereign debt becomes more attractive when interest rates fall, and so panelists noted that opportunities also could be seen in US bond-related assets if rates fell further. Charlie Hu, Head of Fixed Income, at Taikang Asset Management (Hong Kong) Co. Ltd, and CSOP’s Zhang, cautioned, however, that such assets may be subject to volatility as the US Presidential election plays out at the end of the year.

Hu also warned that rising valuations for resource-based stocks linked especially to oil and copper, could spark a return to higher inflations as raw materials costs rise.

 

 

 

Navigating geopolitical change

Russia’s invasion of Ukraine, conflict in the Middle East, rising Sino-US tensions over Taiwan, trade spats, and supply chain challenges that have dragged on from the pandemic have all cast a shadow over markets in the past year. Neither of those are likely to abate soon and could even be exacerbated depending on the result of the US Presidential election; a Trump win could lead to more fractious relations between Washington and China.

But with half the world’s population having already elected, or about to elect, their leaders in 2024, it’s not just uncertainty over the outcome in the US that could have global repercussions, CSOP’s Zhang said.

A right-wing swing in European elections could bode ill for ESG investments and would raise the prospects of greater protectionism in sustainability-related products, such as electric vehicles, of which China is the world’s leading exporter. This needs to be recognized in the GBA, Zhang said.

Europe is China’s “most important ally in the new energy industry,” he said. “If Europe imposes tariffs or trade barriers on us in order to protect their own local automobile industry, how are we going to respond? This is something that we all need to think about in the future.”

In other respects, however, the international investment environment is offering promise. GBA fund firms are taking advantage of opportunities in emerging markets, particularly in Southeast Asia and India. Testament to the rising importance of the latter, Bloomberg has included Indian sovereign bonds in its EM index this year.

The impact of China’s real estate market

Closer to home, China’s economy could yet provide potential flashpoints. The market is estimated to have contracted 20% in its recent correction, the panel was told. Weakness in Mainland China’s property market threatens to ripple through the economy as confidence is sucked from ordinary peoples’ largest store of wealth — their homes — undermining their consumption habits.

 

“It’s a tricky thing if there’s a persistent expectation that house prices will go down and there’s no way to reverse it,” said Taikang’s Hu. “Real estate is tied to the entire economy, including the employment of residents. Only higher income expectations can save the housing market.”

Daniel Li, CIO Equity, GaoTeng Global Asset Management Ltd. cautioned that there was a risk of greater shocks ahead if supportive policies are not delivered. Without those, companies could go bankrupt.

“It is possible that the supportive policies will be less than what people think,” Li said. “If some relatively large companies really go bankrupt and fail to get rescued, I think this will have a certain impact on the market at least in the short term.”

Jun Ning, Portfolio Manager, Fullgoal Asset Management Co. was less pessimistic, however. While she recognized that property values could pose a systemic risk to credit conditions and the broader economy, she pointed to several factors likely to mitigate against a deep shock. Mainland China’s government has already offered support, in the form of a cut to the five-year lending rate, and other policies were promised. She also said that any property-led crash would be precipitated by reduced consumption, but this had not been the case.

In any event, investors had insulated themselves against the impact of falling property values by divest of real estate shares, she said.

Zhang agreed, saying that as long as policies remained supportive then the real estate market, which is valued at around $250 trillion, would remain a stabilizing force in the economy.

 

Conclusion

The GBA’s fund management industry is in a healthy position to capitalize on future economic improvements. While the panel’s leaders reflected that the macro-economic and geopolitical situation were complex and made forecasts difficult, they took solace from the fact that sales figures from the Hong Kong Investment Funds Association were 47% higher year-on-year in January and that new opportunities had been opened by
regional policy decisions.

“Previously, Hong Kong and GBA investors were mainly interested in local stock and bond markets. However, with the introduction of Hong Kong registered mutual funds, they can now easily access overseas capital markets,” said Nelson Chow, Managing Director of Alliance Bernstein Hong Kong. “This has enabled investors to make more flexible asset allocation decisions.”

 

Further growth is expected, too, with the introduction of new investment products, including more ETFs, RMB Treasury bond futures and Stock Connect securities, said Bonnie Y Chan, Chief Executive Officer of HKEX. “I would like to express our wish that we can continue to build our connectivity in the coming period of time to include more products,” she said. “I also hope that we can create more opportunities for everyone.”

Bing Li, President of Bloomberg Asia Pacific, hailed the impact that the cross-border investment programs had exerted on the growth of the industry. He pledged that Bloomberg would continue to support wealth and asset managers in the GBA through its industry-leading products and services.

“Bloomberg will continue to be a 24/7 partner to Chinese asset managers and to support the development of the asset management industry. We are proud to play our part to connect global markets with China through advanced data and technology solutions,” Li said. “We are committed to bringing greater transparency and efficiency to the ever-changing marketplace, and helping our clients capitalize on the opportunities and create greater value.”

 

 

The panel speakers comprised
 

Panel discussion 1 —
Offshore China Asset Management Macro Outlook & Multi Assets Strategies

Chao Deng
CEO, HashKey Capital

Felix Ho
Chief Investment Officer, Sun Life Asset Management (HK) Limited

Nelson Chow
Managing Director, Alliance Bernstein Hong Kong

SC Yau
Head of Market Specialist in APAC, Bloomberg

Melody He (Moderator)
Deputy CEO, CSOP Asset Management Ltd
 

 

Panel discussion 2 —
Offshore China Fund Manager China Market Outlook

Charlie Hu
Head of Fixed Income, Fixed Income Investment Department,
Taikang Asset Management (Hong Kong) Co. Ltd

Daniel Li
CIO Equity, GaoTeng Global Asset Management Ltd

Jun Ning
Portfolio Manager, Fullgoal Asset Management Co.

Kerry Zhang
CFA, FRM, Fund Manager, CSOP Asset Management

David Qu (Moderator)
Senior Economist, North Asia, Bloomberg