China has told its securities firms and their offshore units to stop conducting illicit cross-border business, including brokering shares and selling funds to domestic investors, in a bid to plug regulatory loopholes.
(Bloomberg) — China has told its securities firms and their offshore units to stop conducting illicit cross-border business, including brokering shares and selling funds to domestic investors, in a bid to plug regulatory loopholes.
The overseas units must stop all marketing activities and promotions aimed at mainland investors and close all channels for new account openings, including onshore apps and websites, by Oct. 31, according to a notice from the China Securities Regulatory Commission that was seen by Bloomberg News. The CSRC didn’t immediately respond to a faxed request for a comment.
Chinese authorities are increasing scrutiny to prevent people from evading domestic capital controls in a bid to tamp down on cross-border capital flows that could risk financial stability. At the same time, they have been rolling out a series of measures to restore confidence in local markets after stocks have tumbled.
The notice broadens directives to more traditional mainland brokerages. Regulators have previously disciplined online firms such as Futu Holdings Ltd. and Up Fintech Holding Ltd. for catering to mainland China clients through their widely used trading apps.
“The latest notice provides regulatory certainty over the scope of the cross-border brokerage ban,” said Sharnie Wong, an analyst with Bloomberg Intelligence. “The big picture is that they want onshore investors to use the official channels like the stock connect, not these offshore accounts which the regulator regards as ‘unlicensed’ and ‘illegal’.”
China bars its individuals from using their annual $50,000 foreign exchange quota for direct offshore investments including securities, though some brokerages have for years managed to help domestic investors circumvent the rule by opening accounts offshore.
China took aim at illicit cross-border financial services in 2021, with a senior central bank official questioning the legitimacy of online brokers that help domestic investors trade shares listed offshore.
Regulators later ordered Futu and Up Fintech, also known as Tiger Brokers, in late 2022 to rectify “illegal” business activities and stop taking new onshore investors, saying the companies had over the years conducted cross-border equity trading business without approval. The two pledged in May to remove their trading platforms from app stores in the mainland to comply with the regulatory requirements.
The CSRC said in the notice that overseas units of domestic brokerages can still open accounts for Chinese who live and work offshore in accordance with local regulations. They can also continue to provide services for those enrolled in Employee Stock Ownership Plans — a type of incentive scheme that Chinese companies listed offshore offer to their workers.
Existing cross-border operations for domestic investors shall be “dissolved in an orderly manner” and any additional fund transfers into existing accounts should abide by forex rules, according to the notice. Brokerages were also asked to beef up control of their offshore units and establish long-term mechanism to prevent illegal cross-border operations, it said.
Reuters reported earlier on the CSRC move.
–With assistance from Zhang Dingmin.
(Adds analyst comment in fifth paragraph.)
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