Across The Border

Beijing’s tightening of capital controls set to hurt Hong Kong’s financial sector

Beijing wants to plug loophole for hot money outflows given the depreciation of the yuan

PUBLISHED : Monday, 15 February, 2016, 10:01am
UPDATED : Thursday, 25 February, 2016, 3:32pm

Beijing’s recent move to impose a cap on mainlanders using credit cards to pay for overseas insurance policies which are mainly sold in Hong Kong is seen as China’s latest effort to tighten capital controls to prevent hot money outflows as mainlanders flee a depreciating yuan.

Analysts widely belive more control measures will come and the trend would hit hard the local financial sector as Chinese have been the top buyers of stocks, funds, insurance and other investment products in the city.

Holders of UnionPay, the biggest card issuer in China, are barred from February 4 to spend more than US$5,000 to buy overseas life insurance policies. The cap came just a few days ahead of the Lunar New Year, a peak time for mainland tourists travelling to Hong Kong.

Christy Tan, head of markets strategy and research of Asia of National Australia Bank, said the credit card cap was part of recent moves by Chinese regulators to prevent mainlanders from using overseas insurance products as a way to bring money out of the country.

She said this followed other recent measures by the State Administration of Foreign Exchange (SAFE) which instructured banks in Shenzhen, a city right across from Hong Kong, to limit dollar buying by individual and corporate clients.

“China’s recent adjustment to capital flows seem to suggest the authorities are trying to constrain speculative hot money flows while leaving trade and direct investment flows relatively untouched. This probably explains the Chinese authorities’ focus on tightening the enforcement of existing capital controls,” Tan said in a research note.

The People’s Bank of China has also suspended new applications of the Renminbi qualified domestic institutional investors investment (RQDII) scheme as market players say some of the RQDII products have been used to buy not only yuan denominated products but also US dollar bonds options or other products, she added.

“From the range of punishments that have been meted out in the last few months, it’s clear that there are quiet a few loopholes in the current suite of capital control, especially at the enforcement level. However the authorities are still likely to continue to distinguish between hot money flows as opposed to trade or direct investment flow,” Tan said.

Brokers said the tightening of capital control will pummel Hong Kong.

“The insurance policies may only be the first step of capital controls to prevent outflows,” said Louis Tse Ming-kwong, director of VC Brokerage.

“Later, Beijing may also ban or impose a cap on the sum of mainlanders can spend in Hong Kong to buy stocks, funds or it may even restrict companies to spend huge sums to invest in Hong Kong for new development or backdoor listings. This would definitely hurt the cross border fund flow and would be bad news for the Hong Kong investment markets,” Tse said.

Mainland regulations ban any Hong Kong brokers, insurance salespersons to go north to sell any investment products or insurance policies. However, mainland travellers can buy such products during their travel in the city, and they are one of the biggest buyers here.

Some 16 per cent of mainland travellers in 2013 came to Hong Kong purely for investment purposes, while fund products, stocks and investment-linked life insurance schemes were major buying targets, according to a survey sponsored by the Hong Kong Investment Funds Association. The survey was conducted on 4,019 travellers from Beijing, Shanghai, Shenzhen and Guangzhou.

The increasing popularity of mainlanders buying investment products, stocks and life policies alongside cosmetic products and baby formula in Hong Kong would explain why China wants to control such types of outflows.

According to government statistics, the premiums from mainlanders purchasing life insurance policies in Hong Kong hit HK$21.1 billion in the first nine months of last year, representing 21.7 per cent of new premiums from all new policy sales. That was up sharply from HK$3 billion or 6.4 per cent of all new policy sales in 2009.

The reasons mainlanders increasingly like to buy life insurance policies and stocks in Hong Kong last year are due to their fears in the weakening yuan against the US dollar. The yuan fell over 5 per cent last year and many hedge fund managers feels it could fall up to 40 per cent in the coming three years.

Some predict the yuan would be down 5 to 10 per cent this year due to the weak mainland economy.

“The Hong Kong dollar is pegged to the US dollar which would not be affected by the depreciation of the yuan. This is why mainlanders like to come to Hong Kong to buy H-shares, funds, insurance policies and other investment products which are invested in the Hong Kong dollar or the US dollar,” said Benny Mau, chairman of Hong Kong Securities Association. ‘This trend will continue with the expectation of a falling yuan.”

HSBC head of emerging market FX research Paul Mackel said “a sharp escalation of capital outflows, China “hard-landing” risks and/or a global “currency war” will likely see China reassessing its policy options.