Changing dynamics of wealth in Asia
By Julien Le Noble, Chief Executive Officer at GTN Asia
Singapore and Hong Kong are attracting wealth from traditional offshore centres using new fund structures, thus reshaping Asian wealth management and potentially disrupting the global financial landscape.
As the rise of affluence in Asia continues to outpace the rest of the world , Asia’s two prominent financial centres, Singapore and Hong Kong, are aiming to redirect more wealth from traditional offshore centres. Both have approved new fund structures in recent years to compete with traditional countries such as the Cayman Islands, Mauritius, Luxembourg, and the British Virgin Islands.
Singapore’s “variable capital companies” (VCCs), launched in 2020, and Hong Kong’s enhanced “open-ended fund companies” (OFCs), launched in 2018; offer an attractive alternative to both traditional offshore centres, and China’s local onshore options. Singapore’s VCC scheme has made it easier than before to register an investment vehicle in the city-state, with the requirement that a local entity manages it. This is particularly aimed towards local fund managers, who tend to register vehicles in offshore jurisdictions rather than within the country. The scheme has generated significant interest, with over 910 VCCs set up to date. Similar to the VCC, under Hong Kong’s OFC initiative, the fund vehicle has to be managed by a licensed asset manager within the city. By the end of 2022, only 112 fund vehicles were set up under Hong Kong’s OFC – significantly less than in Singapore – but the uptake remains on a growth path.
Both schemes have been successful in their own right, with Singapore having seen significant inflows and a 16% year-on-year growth ($4 trillion), compared to Hong Kong’s AuM yearly growth of 2% to $4.6 trillion. One reason why Singapore’s scheme registered higher uptake is likely due to Singapore’s geopolitical neutrality versus Hong Kong’s close ties to China. Singapore has successfully managed to capitalise on its position as a “non-China” destination for wealth from the Mainland, but also globally. Being seen as a safe destination was further reinforced as relations between the US and China deteriorated in recent years.
In addition, China’s recent crackdown on big tech companies such as DiDi Global and Ant Group has raised concerns about its regulatory landscape. By extension, this has undermined confidence in the Hong Kong market, and, in contrast, placed Singapore under greater spotlight as a stable alternative to house wealth in Asia.
A look at Singapore
The VCC scheme represents a direct challenge to traditional offshore finance centres for which privacy and low taxes were the cornerstone of the value proposition. Since the scheme was introduced, the number of fund management companies established in the city-state has grown to over 1,000, half of which reportedly represent private family wealth, and the rest hedge funds and private equity. This data hints at another shift in the industry – the growing number of family offices being set up in Singapore. This in itself can be seen as a part of a broader shift in asset management, family offices and the overall flow of capital towards Singapore.
Over the years, Singapore has positioned itself as a safe haven with great potential for high returns, and nowadays hosts numerous regional wealth management-focused branches of global financial companies in its Central Business District area. Singapore’s image as a neutral, safe option for wealth has proven attractive to affluent families worldwide and also to Chinese HNWIs looking to safeguard their assets from Beijing’s jurisdiction. In addition, a considerable influx of Chinese companies has sought to hedge against geopolitical risks. As a result, this has triggered a flood of new capital into the island nation. This way, HNWIs managed to navigate geopolitical tensions and the process of decoupling from China. In this context, Singapore is a safe option, with numerous regional wealth management-focused branches of global financial companies located in the Central Business District area.
A look at Hong Kong
In contrast, Hong Kong uses its ties to both China and links to other international hubs to its advantage: A core focus for the city is attracting affluent investors and institutions from mainland China. To achieve this, OFCs are able to allow local and mainland investors to buy into exchange-traded funds and wealth management products in both markets. But Hong Kong’s take-up remains modest relative to Singapore: 40 OFCs were established in 2021 and 64 in 2022. It is apparent that the increasing omnipresence of China is inhibiting the scheme’s success potential, with many Chinese investors selecting Singapore as a destination for their money.
Nonetheless, Hong Kong has also begun actively courting family offices, as can be observed by their invitation-only Wealth for Good in Hong Kong (WGHK) summit early this year in March. The event is a key initiative by the Hong Kong government and attracted some of the most influential family offices around the world. Through this move, Hong Kong intended to showcase its appeal and potential as an international asset and wealth management hub. As part of their incentives, the government has also issued a policy statement comprising eight measures to help family offices establish their presence in Hong Kong.
Both VCC and OFC are relatively new compared to the offerings of traditional offshore centres like Mauritius, the Cayman Islands and the British Virgin Islands. Therefore, it will likely take some more time for HNWIs and institutions to adopt them en masse and move their wealth from traditional centres to family offices in Singapore and/or Hong Kong. Those used to a particular jurisdiction and vehicle may be reluctant to transition to newer fund vehicles due to their familiarity with the traditional offshore centres and their benefits. But with Singapore’s and Hong Kong’s sterling reputation and robust regulatory frameworks, it is likely that, in time, more HNWIs and institutional clients may move their wealth into Singapore and Hong Kong.
Singapore’s VCC and Hong Kong’s OFC schemes have the potential to disrupt the global wealth management landscape. Singapore especially continues to emerge as a strong contender in the global investment landscape, with its favourable tax regimes, streamlined regulations, operational efficiencies and neutral geopolitical stance. The schemes’ success to date is already affecting the dynamics of wealth management in Asia. In future, these or similar schemes may compel China and other wealth management hubs to change and improve their offerings.
The expansion of business opportunities for wealth managers and other financial services, means that prominent global financial institutions have redirected their focus towards Asia, considering the escalating scale of activities in the region. Therefore, local wealth management companies from Singapore and Hong Kong will have to examine their business models and ask themselves if they are ready to compete with contenders on a global scale.
Cited Research References
1. Asia-Pacific should use its increasing wealth more productively
2. ACRA Business Statistics Registry
3. Singapore Asset Management Survey 2021
4. Asset and Wealth Management Survey 2021
5. Singapore VCC: Progress Update and What’s Next
6. Wealth for Good in Hong Kong Summit demonstrates city status as world-leading family office hub