Hong Kong looks to boost financial services links with mainland China

Hong Kong’s Financial Services Development Council (FSDC) said its proposals (16-page / 672 KB PDF) are designed to further improve the ‘Closer Economic Partnership Arrangement’ (CEPA), the first free trade agreement between the mainland and Hong Kong that entered into force in January 2004.

The FSDC, which advises Hong Kong’s government on areas related to diversifying the financial services industry, said its proposals follow a review of existing arrangements under CEPA. Consultations the FSDC said it has had with industry representatives will help to shape a “roadmap for enhancing the implementation of measures related to financial services under CEPA”.

Proposals include allowing the establishment of mutual funds for Hong Kong stocks in the mainland. Exchange traded funds for Hong Kong equities portfolios have been launched in the mainland under CEPA. However, the FSDC is calling for Hong Kong financial institutions to be allowed to distribute open-end mutual funds in the mainland, in cooperation with partners, “targeting investment stocks listed in Hong Kong”.

“To further strengthen the financial cooperation between the mainland and Hong Kong, we suggest that investment funds established and registered in the mainland could be distributed in the Hong Kong market and vice versa,” the FSDC said.

According to the FSDC, the threshold for Hong Kong insurance companies entering the mainland should also be lowered.

Under existing arrangements, Hong Kong insurance companies must have at least $5bn of assets and “not less than 30 years of operating experience” before they can enter the mainland’s insurance market, the FSDC said. Even if they meet those requirements, insurance companies can still only enter the mainland in the form of a joint venture, on condition that they hold not more than 24.9% of the share capital in the joint venture.

The FSDC said: “We consider that there is room for these requirements to be relaxed, and suggest that the relevant thresholds be lowered to, respectively, at least 2 billion renminbi ($326 million) of assets, not less than 20 years of operating experiences, and a cap of 50% of share capital in a joint venture insurance company in the mainland.”

The FSDC is also calling for “an arrangement of introducing brokers and executing brokers” to be introduced. Under the proposed arrangement, introducing brokers in Hong Kong would receive funds and orders from their clients, and then transfer the orders to the executing brokers in the mainland, who would in turn place orders for stocks and futures and handle their settlement. “We believe that this arrangement would be mutually beneficial to both the mainland and Hong Kong,” the FSDC said. “We suggest that this liberalisation arrangement could initially be introduced as a pilot programme in Guangdong Province, particularly in the proposed free trade zone.”

In addition, the FSDC recommends expanding a supplemental measure under CEPA that allows Hong Kong banks to set up “cross-location sub-branches” in Guangdong Province.

Around 60 such sub-branches have been set up to date, the FSDC said. “We believe that this measure has reached a mature stage and gradual expansion to more provinces in the mainland could be considered. We consider that all mainland branches of Hong Kong banks, which have achieved certain level of business volume and fulfilled certain conditions, should be allowed to benefit from this expanded measure.”

The FSDC said it had been told by industry professionals that there is “considerable room” to enhance measures under CEPA. The development of the Shanghai Free Trade Zone “should be seen as a sign that China is willing to accelerate and deepen its economic and financial reforms, which also implies that more liberalisation measures would be introduced in the future under CEPA”.