(Bloomberg Opinion) — Hong Kong is branding itself as a global wealth-management hub. The government doesn’t levy any capital gain. It’s offering generous tax breaks to family offices that want to set up in the city. Recently, Wealth Management Connect, a program that allows mainland Chinese in Guangdong province to the north to invest directly cross-border, had its investment quota raised. Banks such as HSBC Holdings Plc and Standard Chartered Plc were quick to roll out new products.
But if one looks carefully at the city’s track record, the score card is not great, especially for the middle class. While Hong Kong is a tax haven and the cost of borrowing has been low, an overly cautious government skeptical of people’s ability to understand and manage risk resulted in excessively tight regulations. As such, residents have largely missed out on the regulatory light-touch and the sizable returns enjoyed by the wealthy.
The Global Financial Crisis changed Hong Kong’s tolerance toward retail investing. About 43,000 residents had bought an estimated $1.8 billion of minibonds arranged by Lehman Brothers Holdings Inc. and sold by the city’s lenders. These complex structured products became worthless after the US bank’s bankruptcy in 2008, leading to lawsuits, daily protests and blame games.
Small investor protection has since became the politically correct thing to do. Bonds traded over-the-counter, which is the market norm, are off-limits to retail investors. As of 2020, only 64 out of the 1,574 bonds outstanding were offered to the public.
This perhaps explains why Hong Kong residents made up around a third of HSBC’s investor base, and why many were enraged in 2020 when the UK-headquartered lender cancelled its dividend payouts following a de-facto order from the Bank of England. With few decent fixed-income options available, the middle class had to use dividend-paying stocks as a proxy. HSBC currently offers a 7.8% dividend yield.
How the government defines professional investors, who have access to a much broader range of products, showcases its bias against the middle class. Only those with portfolios worth at least HK$8 million ($1 million) are seen as sophisticated. But are they? Many private banking clients are merely glorified day traders. They are rich, but not necessarily savvier.
Hong Kong’s property cooling measures, scrapped last week, took away another golden goose from the middle class. A decade ago, just when the real estate market started to take off and mortgage rates were hovering at a rock bottom 1%, households were discouraged from levering up because of the stringent maximum loan-to-value ratios the Hong Kong Monetary Authority implemented. As of 2021, about two-thirds of homeowners were mortgage-free, versus 52% in 2006, data from the government’s census bureau shows. While the HKMA did a fine job keeping the leverage down for the masses, it limited their exposure to the massive property asset inflation.
Meanwhile, all these stringent regulations have not kept retail money out of harm’s way. Mom-and-pop investors can still buy shares, and they have been repeatedly burned by penny stocks that experienced surging trading volumes for no obvious reasons, followed by equally enigmatic flash crashes. Last week, the Securities and Futures Commission said it started court proceedings against Ding Yi Feng Holdings Group International Ltd., which at one point was the top performer on the MSCI’s global index, for stock manipulation that occurred in 2018. Isn’t the SFC’s legal action too little, too late? And who said stocks are less risky than high-yield corporate bonds.
Right now, Hong Kong is very much looking outward, keen to attract inflows from foreign funds and mainland Chinese. But the government should look inward, too, and ask whether it has done enough to foster a healthy asset-management industry that serves the local community. If it has done this, foreign portfolio money will naturally follow.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She is a CFA charterholder.
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Published: 04 Mar 2024, 01:55 AM IST