Capital Flows into Hong Kong Assets

As 2023 unfolded, a remarkable resurgence of capital into Hong Kong captured the attention of financial analysts worldwide. The influx of domestic investments sparked a series of significant trends across various sectors in the region.

One of the most notable developments has been the explosive growth of the insurance industry in Hong Kong. Following the re-establishment of travel connections between mainland China and Hong Kong, a wave of mainland citizens flocked to the city to secure insurance policies. The Hong Kong Insurance Authority reported that the total sum of newly issued insurance policies soared to an astonishing HKD 59 billion in 2023, excluding renewals. Among these, a staggering increase of 13,134.1% was noted in the purchase of savings life insurance, indicating that mainland customers are increasingly drawn to the insurance offerings available in Hong Kong.

The first quarter of 2024 witnessed a further escalation, with mainland visitors purchasing new individual life insurance policies totaling HKD 15.626 billion, marking an impressive annual growth of 62.5%. Notably, prominent insurance companies such as Fuxing, Anxin, and Baoxing recorded remarkable upticks in their revenue, with Fuxing reporting a staggering 261.9% increase in new policy premiums.

Interestingly, the firestorm of interest in Hong Kong insurance has evolved since the pre-2019 era, which primarily drew the middle class seeking critical illness coverage. Post-pandemic, the focus has shifted towards higher net-worth families looking to safeguard their assets amidst a volatile economic landscape.

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Analysis of new policy premium compositions reveals that lifetime insurance products, including participating and leverage life insurance, accounted for an impressive 77.5% share. Short-term savings insurance trailed with a 14.5% share, while participating savings insurance emerged as the most favored option among consumers. Hong Kong's financial infrastructure—with its high degree of autonomy, independent judiciary, and absence of foreign exchange controls—provides a formidable foundation for this thriving insurance market.

The regulatory framework in Hong Kong mandates insurance companies to uphold a high standard of transparency. According to the Insurance Ordinance, particularly GN16 regulations, insurers are required to disclose a minimum of five years' performance data for their products. Recent legislative changes now demand that companies provide at least 30 years of information, enhancing consumer confidence and showcasing regulatory vigilance in the long-term management of insurance products.

Another significant phenomenon has been the surge in demand for bank account openings in Hong Kong. The city's banking institutions have experienced an unprecedented influx of clients eager to take advantage of favorable investment opportunities. Strategies to secure openings have become increasingly creative; individuals engage in what can be termed "commando-style" bank account opening trips, making competitive dash trips to banks to secure limited daily quotas.

In the first quarter of the year, Hong Kong emerged as an international financial hub, attracting over 130,000 new customers to HSBC, while Bank of China Hong Kong welcomed an astounding 200,000 new cross-border clients. The Hong Kong Monetary Authority (HKMA) reported a staggering 342% increase in new accounts for non-residents at Hang Seng Bank, with a significant portion originating from mainland China.

Despite the positive reception, challenges have arisen with the banks continuously raising the barriers for new clientele. For instance, opening an account at Bank of China Hong Kong now requires accompanying insurance purchases or a minimum investment in financial products. Citibank increased its minimum deposit requirement for non-Hong Kong residents from HKD 10,000 to HKD 1.5 million, while China Merchants Bank has stipulated that a minimum of HKD 8 million is required to open a basic account.

Hong Kong has established itself as a prime destination for overseas investors, with many individuals seeking bank accounts primarily for purchasing Hong Kong insurance products, securing high-yield time deposits, and investing in stock markets—both domestic and international. The desire to capitalize on the wealth opportunities offered by Hong Kong's high-interest rates has drawn considerable interest from the mainland.

The "Southbound Pass" of the Cross-Border Wealth Management Connect has also witnessed an explosive increase in transactions. Launched as a financial initiative for the Greater Bay Area residents, it allows residents to access investment products across borders. In April, the amount of cross-border remittances through the Southbound Pass surged to RMB 22.3 billion, compared to a mere RMB 382 million during the same period in 2022—a staggering increase of over 60 times!

Historically, mainland residents faced strict foreign exchange controls limiting their annual outbound investment to USD 50,000. The Cross-Border Wealth Management Connect, however, allows for a more liberating investment journey. This has granted mainland residents more leeway in diversifying their assets without being constrained by foreign exchange limits.

The popularity of the Southbound Pass underscores the demand for higher-yield fixed income products among mainland investors seeking refuge in a period of market uncertainties and low interest rates.

Additionally, another unfolding trend is related to the retraction of stringent property purchase regulations in Hong Kong, enticing mainland buyers. In a bold move, Financial Secretary Paul Chan announced in the 2023 budget that the previously imposed additional stamp duties on residential property transactions would be lifted, effectively leveling the buying field for mainland buyers seeking real estate in Hong Kong.

The removal of these regulations has led to a phenomenal rise in property transactions. Reports indicated that, for the first quarter, registration volumes from mainland buyers surged to about 37.2% for newly built residential properties—marking a 12-year high. Similarly, in the secondary housing market, mainland buyers represented approximately 14.8% of the total registrations, the highest rate seen in 14 years.

What drives this massive influx of mainland capital into Hong Kong? Convenience plays a significant role—enhanced transportation links, including new high-speed train routes between mainland cities and Hong Kong, make the travel experience seamless. Moreover, Hong Kong's financial institutions are eager to serve clients with robust banking options, welcoming mainland clients with open arms as long as they present a steady flow of funds.

Furthermore, with prevailing interest rates trending downward on the mainland, there is a marked desire among investors for offshore opportunities. Hong Kong acts as a sort of financial buffer for investors, offering both growth potential while serving as a safe haven. The city’s currency peg to the US dollar means that interest rates hover around the 5% mark, making it an attractive proposition for investors.

Lastly, the desire to diversify risk plays a critical role in this financial migration. Increasingly, affluent citizens in mainland China have recognized the value of cross-border asset allocation, determining that their wealth is better safeguarded through international diversification. Research shows that the proportion of overseas investments among wealthy Chinese surged from around 28% in 2021 to an extraordinary 51% in 2023—a reflection of the evolving landscape driven by post-pandemic uncertainties and shifting global geopolitical dynamics.