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HONG KONG (Reuters) – In an unprecedented move, China has issued an official notice barring domestic brokerages and their overseas subsidiaries from accepting new mainland clients for offshore trading, as revealed in a document viewed by Reuters and confirmed by four reliable sources.
The directive also strictly monitors new investments from existing mainland clients to prevent them from circumventing China’s foreign exchange controls. This move, designed to curb capital outflows, coincides with China’s slowing economic growth, which has prompted increased investment overseas, resulting in pressure on the yuan and pushing authorities to intensify efforts to stabilize the currency.
The yuan, one of Asia’s weakest-performing currencies, has depreciated by 5.5% this year, attributed to China’s post-pandemic economic recovery losing steam and the dollar’s surge due to interest rate disparities and global geopolitical uncertainty. In response, authorities have introduced a series of measures in recent months to stem the currency’s decline.
According to a notice issued by the Shanghai unit of the China Securities Regulatory Commission (CSRC) on September 28, brokerages have been instructed to cease offering securities trading services from offshore accounts, such as those in Hong Kong, to new mainland investors.
Activities that are now considered illegal include cross-border securities broking, securities lending, fund sales, and investment consulting, as outlined in the notice. Although the effective date of this new directive is not specified, the sources believe that it is intended to take immediate effect.
The notice also sets an end-of-October deadline for the removal of apps and websites that solicit mainland clients, adding that offline channels for opening accounts should be shut down.
The CSRC has not responded to Reuters’ request for comment, and the sources chose to remain anonymous since they were not authorized to speak with the media.
Shujin Chen, the Head of China Financial and Property Research at Jefferies, explained, “We believe the primary policy objective is to curb capital outflows, particularly in the context of yuan depreciation pressure.”
From an industry perspective, this policy will have a more significant impact on brokerage firms with substantial offshore retail businesses, such as state-owned Citic Securities, CICC, and Haitong Securities, for whom offshore trading services represent a significant source of revenue for their Hong Kong units.
At the time of this report, the three brokerages mentioned had not yet responded to Reuters’ requests for comment.
Transitioning from Limited Guidance to a Comprehensive Ban
The ban on offshore investments through domestic brokerages comes in the wake of two online brokerages, Futu Holdings Ltd and UP Fintech Holding Ltd, announcing in May the removal of their apps in China, reflecting Beijing’s heightened focus on data security and capital outflows. In December of the previous year, the CSRC accused the two brokerages of operating cross-border securities businesses involving domestic investors without regulatory approval.
A few months later, Shanghai-based Guotai Junan received similar informal instructions, as reported by a source familiar with the matter. State media also reported in February that some Hong Kong units of Chinese brokerages had ceased opening accounts for mainland clients, following informal CSRC guidance aimed at discouraging illegal capital outflows.
Using offshore brokerage accounts in Hong Kong involves converting yuan into other currencies. However, Chinese individuals can still invest offshore through the Stock Connect program with Hong Kong or through quota-based programs like the qualified domestic institutional investor and qualified domestic limited partnership schemes. They can also use certain foreign brokerage platforms located outside mainland China if they have funds held in offshore locations.
A research note from Hwabao Securities revealed that by the end of 2022, a total of 27 listed Chinese securities brokerages had established offshore units, with the largest ones providing offshore trading services for mainland investors.
