Chinese authorities have imposed a hard-line crackdown on internet securities firms that have been used for overseas stock investments, moving to tighten controls on capital outflows. The market views the move as going beyond simple financial regulation, interpreting it as the government effectively beginning in earnest to block de facto roundabout overseas investments. In particular, as the flow of mainland Chinese funds into the U.S. stock market is blocked, changes are expected in the structure of Greater China financial markets, including Hong Kong.
The China Securities Regulatory Commission (CSRC) and seven ministries on the 22nd imposed fines and confiscated illegal revenue totaling $330 million (about 494.7 billion won) on internet securities firms Tiger Brokers (老虎证券), Futu Holdings (富途), and Longbridge Securities (长桥) on suspicion of "cross-border illegal securities business." Authorities also ordered a complete suspension within two years of overseas securities services targeting mainland China, as well as related websites, mobile apps, and server operations.
Authorities had already banned mainland China new client solicitation by overseas securities firms in 2022, but the measures appear to have been tightened this year. The most notable feature of the latest move is that it goes beyond blocking new account openings to directly making existing investors subject to regulation. Mainland investors currently using the platforms are prohibited from making additional deposits and new purchases, and only the sale of existing holdings and withdrawals are allowed.
◇ "Blocking roundabout overseas investments"… capital outflow controls in full swing
According to Singapore's Lianhe Zaobao on the 26th, the move is intertwined with capital outflow issues. Bloomberg Industry Research estimates that funds that left China through informal channels last year reached about $1.04 trillion (about 1,560 trillion won). That is the largest amount since related statistics began in 2006.
Until now, Chinese retail investors have invested indirectly in overseas securities markets through internet securities firms based in Hong Kong or Singapore. They reportedly used the individual foreign exchange quota of $50,000 per year (about 75.01 million won), signed up for Hong Kong insurance products and then received refunds, or used underground money exchange networks.
Chinese authorities judge that this flow increases risks to the yuan exchange rate and financial stability. In particular, they took issue with the fact that funds flowing out to U.S. and Hong Kong stock markets weaken liquidity in mainland Chinese stocks and reduce the Central Bank's control over the money market.
In the announcement, authorities emphasized that "overseas platforms outside regulation are heightening the risks of money laundering, illegal foreign exchange transactions, and financial fraud." This is interpreted to mean that they view unmonitorable fund movements as the problem, rather than overseas stock investment itself.
◇ Access to U.S. stocks declines… Hong Kong may see spillover gains
The market expects the measure to significantly reduce Chinese retail investors' access to U.S. stocks. It is also analyzed that it will affect supply and demand for U.S. tech stocks favored by Chinese investors and for Chinese ADRs (Chinese companies listed in the United States). Immediately after the announcement, Futu Holdings shares plunged 28% in a day, and Tiger Brokers fell more than 25%. The Nasdaq Golden Dragon China Index, which focuses on Chinese tech stocks, also weakened.
On the other hand, some expect the impact on Hong Kong's financial market to be limited. Local China International Capital Corporation (CICC) estimated that Hong Kong asset size affected by the regulations could reach up to HK$250 billion (about 4.8 trillion won). However, as those assets include cash, funds, and derivatives, and the unwinding process will take two years, it analyzed that the short-term shock would not be significant.
Some even suggest that Chinese funds that had been heading to the United States could return to the Hong Kong stock market. In particular, there are views that big tech corporations from China that have completed dual listings in Hong Kong, such as Alibaba, could benefit. Xu Zhajian, co-founder of the Hong Kong think tank Bauhinia Policy Research Institute, told Lianhe Zaobao that "Hong Kong financial institutions with high proportions of U.S. stock investments, and especially the securities firms penalized this time, may see short-term pressure on their share prices," but added, "Some funds could move to Hong Kong instead of the United States, which could actually be positive for the Hong Kong market as a whole."