Chinese capital outflows to boost Hong Kong markets, central bank chief says

(This March 26 story has been corrected to say that wealth connect accounts shot up in the 12 months from February 2024, not four months, in paragraph 8)

By Selena Li and Kane Wu

HONG KONG (Reuters) - Hong Kong's central bank head said on Wednesday that he expects Chinese capital inflows to Hong Kong to provide the biggest opportunity for the financial hub's capital markets in the next few years.

Hong Kong is planning to further relax rules on a wealth connect programme with China's Greater Bay area and is exploring whether it can extend its coverage to more mainland cities, Eddie Yue, chief executive of Hong Kong Monetary Authority, said at HSBC's Global Investment Summit in Hong Kong.

"I think the bigger opportunity in the next few years will come from what we call Southbound, Chinese capital going out to the world through Hong Kong," Yue said, compared to northbound flows that are offshore capital going into the mainland.

China still places strong capital controls to manage flows in and out of the border, with a few connect schemes permitting capital to be deployed in some key offshore market such as Hong Kong.

Global investors have been accessing Chinese assets through the offshore investment hub, but a weaker outlook for the world's second-biggest economy and geopolitical uncertainties have slowed foreign capital inflows in recent years.

Chinese investments overseas, however, have picked up and Hong Kong has benefited from these capital flows.

Yue said the easing of rules governing the wealth connect scheme, launched in 2021, had helped boost capital flows into the city.

The number of Chinese investor accounts under the scheme shot up from 25,000 to 95,000 in the 12 months following the relaxation of the rules in February last year.

Yue didn't disclose more up-to-date figures, but added that authorities plan to further relax the scheme's investment rules.

"We will also explore whether it is possible to even extend the scheme geographically to other parts of China," he said.

Between 20% and 30% of Hong Kong stock market's turnover is capital flowing from China through the stock connect, according to Yue.

That trend is expected to strengthen in the years ahead, Yue added, as Chinese investors continue to utilise stock, bond and wealth management connect channels to invest in the offshore investment hub.

"I'm quite hopeful that all these Southbound capital coming out from China into the world through Hong Kong will help provide the next push for Hong Kong's capital markets," he said.

Offshore listings of Chinese companies in Hong Kong have swelled in recent months, with sizable tech and consumer companies expected to raise billions in the coming weeks.

Yue said more long-term investors are returning to the Hong Kong market, encouraged by Beijing's stimulus policies and hopes fuelled by AI innovation such as DeepSeek.

The banking chief also expects Hong Kong to benefit from the rising usage of the Chinese yuan in international trade in recent years spurred by a shift in trade corridors.

"We're also seeing a lot of funding activities in Hong Kong issuing RMB bonds," he said, adding that issuance doubled in three years to more than 1 trillion yuan ($137.66 billion) in 2024, and RMB lending increased by three times to 750 billion yuan during the same period.

($1 = 7.2645 Chinese yuan renminbi)

(Reporting by Selena Li and Kane Wu; Editing by Christian Schmollinger and Shri Navaratnam)