HK brokers’ reopening euphoria dealt a blow by China clampdown

HONG KONG - China’s order to its biggest online brokerages to stop taking on new onshore investors could not have come at a worse time for Hong Kong’s struggling financial firms.

As preparations are in full swing to reopen the border with mainland China as early as Jan 8 after more than three years of Covid-19 restrictions, hopes for a bonanza of fresh clients have been cast into doubt by the demand to a halt of “illegal” activities by Futu Holdings and Up Fintech Holding. 

Wary of crossing Beijing, the city’s brokerages are now studying the latest missive. Since the order was made public late last week, at least three brokerages have halted or are reviewing marketing plans in mainland China, said the heads of the firms, who asked not to be named discussing a sensitive regulatory subject. 

“It is unclear on which area the latest scrutiny by Chinese regulators rests,” said Mr Tom Chan, vice-chairman of the Institute of Securities Dealers. “We are left with few choices but to wait and see in order not to violate the red line.” 

The Communist Party-ruled country’s capital controls bar individuals from using the US$50,000 (S$67,000) annual foreign currency quota for purchases of securities and insurance offshore, but many in mainland China have ignored the law and skirted the rules by opening up accounts abroad. 

After almost a year of scrutiny, regulators late last week singled out Up Fintech, which is more commonly known as Tiger Brokers, and Futu, telling them to rectify their “illegal” mainland businesses. Mainland customers accounted for about 10 per cent of Futu’s new users last year, according to an estimate by Daiwa Capital Markets Hong Kong. Up Fintech had over 20 per cent of its new funded accounts from mainland China in the third quarter, chairman Wu Tianhua said on its latest earnings call in November.

The regulatory uncertainty caused Futu to delay its Hong Kong listing. Futu’s shares slumped 31 per cent in US trading on the day of announcement, while Tiger dropped 29 per cent, wiping out US$3 billion worth of market value combined on the last trading day of 2022. 

Workarounds for Chinese mainlanders have existed for years and many had paid little heed to the capital controls, making it hard to estimate the size of illegal cross-border capital flows. Still, the practice has been so rampant that Chinese police clamped down on over 2,500 illegal payment platforms and underground money exchanges in 2022 alone.

Initial public offerings by big Chinese firms have been a particular lure for mainland investors who piled into hot offerings such as Kuaishou Technology. In 2021, as the US mulled delisting Chinese firms traded on American exchanges, some Hong Kong brokers saw a 10-fold surge in new accounts.  

Buying insurance policies in Hong Kong had also been popular among mainland Chinese. New business derived from mainland visitors shrank from HK$6.8 billion (S$1.16 billion) in 2020 to about HK$688 million in 2021 as travel was restricted.  

Hong Kong brokers have frequently held promotion and marketing campaigns in mainland China, including in-person investment seminars or through social media. But they are not allowed to take on clients without a licence. 

Still, as long as the cash eventually found its way to a Hong Kong account, local trading firms asked few questions about where it came from, according to local brokers, who asked not to be named.

The new rules have cast a pall over the industry. Futu’s existing customer base on the mainland may decline by 20 per cent every year from 2023 onward and its earnings will be cut by “high-single-digit” this year, according to Daiwa analyst Leon Qi. BLOOMBERG