A Financial Shopping Paradise

The rise of investment demands in Mainland China has signaled a huge opportunity for Hong Kong. What should Hong Kong do to seize it? A CUHK Business School professor suggests upgrading Hong Kong’s current status from a commodity shopping destination to a financial shopping hub to accelerate the city’s economic engine and resolve some of the current social troubles

By Fang Ying, Senior Writer, China Business Knowledge @ CUHK

As the distribution center of the world’s most famous brands, Hong Kong is well-known as a shopper’s paradise. Naturally, tourism has become one of the core pillars of Hong Kong’s economy. However, some of the city’s past glory is fading. The influx of visitors has brought troubles to local residents’ lives and overstretched the city’s tourism capacity. According to the Hong Kong Tourism Board, the number of visitors from around the world received by Hong Kong in 2014 reached 60.84 million, and Mainland China continued to be the largest source of visitors. How should Hong Kong handle the increasing number of visitors? This question has sparked off numerous rounds of discussions.

Faced with this pressing issue, Yinggang Zhou, Assistant Professor of the School of Hotel and Tourism Management and Director of the Center for Hospitality and Real Estate Research at the Chinese University of Hong Kong, says it is imperative to transform and upgrade the city’s current business model in the tourism industry. In a paper titled “China’s Road to Financial Opening: A Perspective of Chinese Individual Outward Investments and the Role of Hong Kong,” published by The Hong Kong Institute for Monetary Research (HKIMR), he wrote that with its competitive edge in the finance services industry and rich experience in tourism industry, Hong Kong can develop itself into a financial shopping paradise.

Prof. Zhou says that Hong Kong has a long history serving as a gateway for Chinese outbound investments and playing a crucial role in helping China participate in the international financial market. In recent years, China has revealed its ambition to be a financial superpower in the global market. At the same time, as capital controls in China starts to ease up, the demand from both mainland individuals and corporations for cross-border financial services in Hong Kong has been growing steadily.As such, Hong Kong has every reason to take on a leadership role to leverage on China’s capital outflow and seize the opportunity outlined in China’s “Twelfth Five-Year Plan,” which aims to build Hong Kong as an international asset management center and offshore RMB center. Along the same vein, Prof. Zhou proposes to further upgrade Hong Kong’s existing financial service industry to a “financial shopping paradise.”

“With its competitive edge in the finance services industry and rich experience in tourism industry, Hong Kong can develop itself into a financial shopping paradise.” – Prof. Yinggang Zhou

How can Hong Kong develop itself into a financial shopping paradise? Prof. Zhou believes that it should meet the following criteria:

First, an ideal “financial shopping paradise” should have rich and diversified financial products and services, such as offshore RMB and insurance products, to meet the different needs of consumers, particularly high net worth individuals in Mainland China. According to the report, “Global Wealth 2014: Riding a Wave of Growth” released by the Boston Consulting Group, China ranked second in the world in terms of the number of millionaire households, rising from 1.5 million in 2012 to 2.4 million in 2013. Prof. Zhou cites the insurance industry as an example of a sector with high potential for expansion because insurance products in Hong Kong are better than their mainland counterparts.

He points out that there is an increasingly number of mainland residents visiting Hong Kong to purchase insurance products and services in recent years. According to data from the Office of the Commissioner of Insurance, Mainland visitors bought HK$16.9 billion’s worth of new insurance premiums in Hong Kong, representing 20.3 percent of the total amount of new insurance premiums in the first three quarters of 2014.

“Compared with the mainland insurance industry, Hong Kong’s insurance industry has reached international standards and provides more investment channels and better returns,” Prof. Zhou explains. “In Hong Kong, mainland consumers can enjoy better services and returns at a cheaper price.”

Second, the financial shopping paradise should provide high-quality wealth management services and aim to be the top international asset management center in Asia. Besides helping Chinese enterprises to raise capital through various channels, Hong Kong also serves as the wealth management center for increasingly affluent mainland individuals. “More and more China’s rich people are realizing the importance of wealth management. Since such financial services in China are still immature, there is a huge potential market for Hong Kong’s financial services industry,” Prof. Zhou says.

According to the Hong Kong Monetary Authority (HKMA), there were more than 40 institutions offering private banking service in Hong Kong by the end of 2013. Prof. Zhou mentions that the Hong Kong government has been putting more efforts into promoting Hong Kong’s asset and wealth management industry in recent years, so it can be expected to see more and more private banks in Hong Kong in the future.

However, he stresses that to maintain its competitiveness, strengthening Hong Kong’s financial cooperation with Mainland China is vital. “For example, the Qianhai special economic zone in Shenzhen can serve as the ‘front desk,’ providing frontline services for mainland customers, whereas Hong Kong remains the ‘operating base,’ designing diversified finance products or services for the customers,” he says.

“More importantly, such cooperation between Hong Kong and Mainland China would force the mainland financial market to reform, accelerating its internationalization process,” Prof. Zhou adds.

Third, the financial shopping paradise should establish an effective and sound regulatory mechanism to protect consumers’ interests. Prof. Zhou points out that due to the differences in financial regulations between Hong Kong and the mainland, Hong Kong needs to establish a specific coordination mechanism to ensure mainland financial consumers’ interests. For example, according to the current regulations in Hong Kong and Mainland China, Hong Kong’s insurance agents are not allowed to sell policies on the mainland, so mainland consumers can only buy Hong Kong policies when they visit the city. If the policy contracts are signed in the mainland, they would be regarded as “underground policies,” in which case the interests of mainland consumers cannot be protected. To that end, insurance authorities such as the Office of the Commissioner of Insurance, need to make sure there are sufficient regulations to address the cross-border sales of insurance policies and that sales agents do not engage in any wrongdoings when they sell policies to mainland consumers.

“Hong Kong has rich economic, accounting and legal expertise and its service industry is well-developed. There is no reason that Hong Kong should miss out on the ample investment opportunities embedded in the China market,” Prof. Zhou concludes.