China’s market regulator announced a sweeping investigation on Friday against three major brokers running cross-border trade, as it launched a two-year crackdown on investment leaving the country.
China does not allow private individuals to invest directly in overseas markets, requiring them to trade assets only through approved third-party channels.
However, regulations differ in the semi-autonomous city of Hong Kong, and some brokers have been able to operate legally there, attracting investors from mainland China to open trading accounts in the Chinese financial center.
Authorities have sought to fix the loophole in recent years and in 2022 banned Chinese private investors from opening accounts with such brokers.
The China Securities Regulatory Commission (CSRC) said on Friday it will investigate and impose fines on brokers registered in Hong Kong, Futu and Longbridge, as well as Tiger Brokers registered in New Zealand.
Regulators said the brokers had conducted securities-related business in China “without obtaining necessary approvals or licenses,” violating China’s securities law.
The CSRC said in a separate statement on Friday that it will join forces with seven other bodies, including the Ministry of Public Security and the People’s Bank of China, to carry out a two-year campaign targeting illegal cross-border securities activities.
The campaign aims to “completely root out the illegal cross-border operations of foreign securities, futures and fund management institutions,” he said.
Futu said in a filing that Chinese authorities have proposed a fine of about 1.85 billion yuan (US$271 million).
Futu “has already ceased opening accounts for applicants with mainland Chinese identities… has continuously engaged in active dialogue with regulatory authorities and complied with their remedial requests,” it said in a statement.
Chinese investors made up about 13 percent of the firm’s total customer base of 29.2 million registered users globally, he added.
UP Fintech, a US-listed brokerage firm that owns Tiger Brokers, said the CSRC fined the company 308.1 million yuan and confiscated 103.1 million yuan of illegal income.
The firm “accepts the sentence sincerely”, she added.
The two CEOs of the brokers were also fined.
The aim of the Chinese authorities “is to gain full control of capital outflows and block any loopholes of these illegal activities”, Kelvin Lam, a China-focused economist at Pantheon Macroeconomics, told AFP.
“What China is trying to do at the moment is to make sure that no overseas branches of these companies … take funds from Chinese investors and help them invest overseas,” Lam said.
Hong Kong’s cross-border agents have operated in a regulatory gray area until now, he said, but authorities are looking to completely curb the flow of Chinese investment out of the country.
“Instead of worrying about the fact of illegal capital flight from China, the aim of the Chinese authorities is to seek full control of the situation and not anything else,” said Lam.
Shares in Nasdaq-listed Futu fell more than 25 percent in Friday trading, with UP Fintech down about 20 percent.
