Edmond Lau, Senior Executive Director, Hong Kong Monetary Authority
Hong Kong: a Leading Hub for Family Offices
Good morning to everyone. I am very pleased to join you for today’s webinar. My special thanks to GCC and Agnes for arranging the webinar series on the future of finance in Hong Kong. The event is most timely. When the world is preoccupied with so many challenges brought by a combination of pandemic and geopolitical tensions, let’s not just focus on the problems at hand and lose sight of the opportunities lying ahead. For Hong Kong’s financial sector, it is not just about scaling new heights in areas we have been playing a leading role at the regional or global level; it’s also about looking for new growth areas and getting ourselves prepared to embrace the new opportunities. One of these is family office (FO), which increasingly has become an important area of private wealth management. So today I am sharing with you the latest developments in the FO space, as well as our continued efforts in fostering the industry’s development.
2. Hong Kong’s resilience
Talking about private wealth management, people naturally think that money should be parked at a safe place. So understandably there would be some question marks about Hong Kong’s status as an international financial centre (IFC) going forward, given the triple whammy we have faced in the past year or so: social unrest, Covid-19, and most recently, the escalation of US-China tensions. Fair enough, so before I move on to discuss the theme of today’s webinar, if you don’t mind I would spare a minute or two sharing some facts and perspectives which hopefully will address some of the concerns.
True that we are still having a very challenging time with lots of uncertainties, but in today’s world this should be the new normal. Despite all these, Hong Kong’s financial sector has been doing extremely well in terms of both resilience and breaking new grounds.
Take our currency as an example. The HKD market continues to operate smoothly under the robust Linked Exchange Rate System. Capital continues to flow into Hong Kong. In recent months, the HKD has stayed firmly in the strong half of the convertibility zone. In fact, since April the HKMA has to repeatedly honour its strong-side convertibility undertaking through market intervention. In around five months we have taken in over US$17 billion from the market and injected HK$130 billion. The continuous inflow has also been reflected in the deposit of the banking system, which recorded a 5% growth in the first seven months of this year.
Another clear sign of our strength is our stock market. It remains one of the most active in the world. Last year, against the backdrop of social unrest, we again claimed the top place in the global IPO league table. This year, IPO activities remained buoyant. In the first eight months this year, over 80 companies were listed in Hong Kong, and the funds raised increased by 74% year on year.
Underpinning this resilience is the strong fundamentals and ample buffers that we have built up over the years. The peg, which is the bedrock of our financial system and the real economy, is supported by sizeable foreign reserves equivalent to around two times our monetary base. Likewise, our banking system is robust, with all key metrics exceeding international standards - Capital Adequacy Ratio at over 20%, a high Liquidity Coverage Ratio at over 150% and a low Classified Loan Ratio at 0.8%.
Without sounding complacent, but I hope you would agree that our financial system has proven its soundness and resilience after undergoing severe political, economic and financial stress tests in recent months. And this provides a solid foundation for the further development of Hong Kong as an IFC.
3. Hong Kong as a premier asset and wealth management centre
Against that backdrop, now let me turn to the focus of my speech today – family office.
The FO sector is a natural extension of Hong Kong’s asset and wealth management business. At the end of 2019, the amount of assets managed in Hong Kong reached a record high of US$3.7 trillion, a 20% year‑on‑year increase despite the outbreak of social unrest in the second half of last year. We remain to be Asia’s largest cross-border private wealth management centre and the world’s second largest, next only to Switzerland. Last year, around US$1.9 trillion in cross-border wealth was booked in Hong Kong.
FO has become a key growth driver of our private wealth management business. The amount of FOs and private trust assets managed by the private wealth management industry in Hong Kong substantially increased by 89% in 2019.
4. Factors behind Hong Kong’s vibrant wealth management business
This remarkable growth is partly explained by favourable macroeconomic environment. Asia-Pacific has seen rapid growth in the financial wealth of high net worth individuals, which more than doubled from about US$11 trillion in 2010 to US$22 trillion in 2019. China in particular is a major contributor to the remarkable growth. There are over 80,000 ultra‑high net worth families in Greater China, an increase of around 20% over the past 3 years. Many of these families have strong connections to Hong Kong – many are residing here or have their businesses listed on our exchanges. Meanwhile, we are expecting to see cross-generational wealth transfer totalling US$15 trillion in Asia by 2030. The creation and passing on of wealth has created rising demand for centralised and professional management of family wealth. This trend is particularly pronounced in Asia-Pacific, which accounts for 30% of the world’s high‑net-worth individuals’ financial wealth, but only hosts 18% of FOs. So there is still much room for growth of this business in this region.
With the unique advantages that we offer, Hong Kong is well positioned to capture this potential growth.
First, our world-class financial services. Hong Kong has a cluster of professional service providers and highly skilled talents that can support every aspect of family wealth management. We are home to over 1,800 asset management firms, including around 70 of the world’s top 100 asset managers. We also have a large pool of tri-lingual talents that have the knowledge and connections to serve both the Chinese and international markets. Our workforce comprises abundant professionals supporting financial services, including over 45,000 certified public accountants, and over 11,000 practicing solicitors and barristers.
Second, unparalleled access to investment opportunities. Hong Kong’s vibrant and diversified financial markets allow us to tailor make value-add solutions and products that meet the specific investment needs of wealthy families. Hong Kong is the dominant gateway to China, which is one of the few places in the world that still see positive growth under COVID. Despite the rising tension with the US, a recent study by Morgan Stanley suggested that China would see portfolio inflows of US$3 trillion over the next decade. The growing use and popularity of various Connect schemes is a testament of the advantages of investing in China through Hong Kong: the Stock Connect now accounts for over two thirds of all A-shares trading by overseas investors, while the Bond Connect accounts for half of Mainland bond trading by foreign investors. So Hong Kong’s unique gateway role to the Mainland market is hard to be replaced or replicated. Hong Kong is also an ideal platform for investors looking for alternative investment opportunities. We are currently Asia Pacific’s largest private equity hub outside Mainland, with over US$160 billion in capital under management.
But Hong Kong is more than just a place to make money, it is also a place to put money to good and worthy use. Many wealthy families have a cherished tradition of philanthropic giving. It is estimated that over 70% of FOs engage in philanthropy, and on average FOs give over US$6 million annually. Hong Kong has a long history of wealthy families setting up philanthropic foundations. Like-minded families can share experience and compare notes here.
ESG investing is another emerging trend that is being embraced by FOs. A recent survey indicates that three quarters of FOs are currently involved in sustainable investments. Here again Hong Kong has much to offer. We have dedicated a lot of effort into developing Hong Kong green finance ecosystem. Last year alone, US$10 billion worth of green bonds were arranged in Hong Kong. The Government is leading by example with its multi-year Government Green Bond Programme. At the HKMA, we are looking at ways to foster sustainable banking and enhancing capacity building for market practitioners. We are prioritising green and ESG investments at the Exchange Fund. We are also joining hands with like-minded stakeholders at the international level to promote the green and sustainable finance agenda.
5. Continued efforts in upgrading our platform for private wealth management
To stay ahead of the game, we are taking steps to further enhance our platform and create opportunities and value for FOs and our wealth management industry.
One of our priorities is to expand the investible universe. To support investors’ growing portfolio allocation to China, we will continue to enhance the various Connect schemes. Very soon we will be welcoming a new member to this family: Wealth Management Connect in the Greater Bay Area (GBA). This new initiative will allow Hong Kong and international investors to better access investment opportunities in the Mainland. Just as importantly, it brings new customers to our wealth management industry: GBA is China’s most economically vibrant region. With a total population of 70 million and a combined GDP of US$1.6 trillion, its economic size is bigger than some G20 countries such as Australia. Many of the residents across the border are still under-served by the private wealth management industry, particularly given the rapid wealth accumulation in the past decades and the growing need to diversify their investments beyond renminbi assets. Like other Connect schemes, this new scheme will take an incremental approach starting on a prudent footing. It’s important that we have a smooth start, so that it will pave way for more full-fledged private wealth management services including the promising prospect of more FO business going forward.
We are also mindful that FOs are increasingly looking beyond traditional asset classes. According to a recent survey, FOs on average allocate as much as 35% to alternative investments including private equity, real estate and hedge funds, compared to 32% allocation to stocks. In this connection, Hong Kong is enhancing its legal and taxation platforms to attract funds for alternative investments to set up and operate. Just last month, we launched a new legal vehicle for private equity fund – the Limited Partnership Fund vehicle. This new vehicle provides a modernized, user-friendly framework for private investment funds including private equity funds to set up and operate in Hong Kong. Also in the pipeline is the Government’s plan to introduce competitive tax concession for carried interest generated by PE funds. These reforms will further consolidate Hong Kong’s leading role in the alternative investment space. And incidentally, the new legal vehicle I just mentioned has also attracted the attention of FO users who see the need to manage family wealth through a structure that can adapt to the evolving global trends of tightening tax and regulatory treatments and can likely sustain through generations.
On top of the major reforms, we recognize the need to provide a friendly and facilitating environment for FOs. The HKMA has been working with the SFC and the private wealth management industry to provide more clarity in our regulatory framework to facilitate the development of FOs in Hong Kong. For example, the SFC has recently provided further guidance on the licensing requirements of FOs. It has also clarified the requirements under its professional investor regime to cater for the circumstances of FOs.
Meanwhile, the one-stop shop service for FOs has recently been launched by InvestHK, to act as the central point of contact to attract and help FOs setting up in Hong Kong. You’ll hear more from InvestHK in the following panel discussion section.
To conclude, let me highlight a few take-aways:
With that, I encourage you to take advantage of what Hong Kong has to offer. If you have any questions or suggestions, please don’t hesitate to let us know.