U.S. Investors Feeling Impact of Chinese Securities Crackdown
The Chinese stock watchdog is increasingly applying the country’s securities law overseas.
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Chinese brokerages are on Tuesday regaining a portion of Friday’s massive selloff, caused by the Chinese stock watchdog’s decision to crack down on “illegal” cross-border business.
The spillover affects U.S.-listed Chinese shares in general, since Chinese buyers are the top driver of interest in such stocks.
The China Securities Regulatory Commission (CSRC) said on Friday that it would “resolutely crack down” on the brokerages Tiger Brokers, Futu Securities International and Longbridge Securities.
Overseas Entities Operating in China
Tiger is based in Auckland, New Zealand, while the Futu and Longbridge units in question are incorporated in Hong Kong, which is technically a “Special Administrative Region” of China with a separate securities regime and laws.
The Chinese stock regulator says the brokerages have been allowing mainland Chinese customers to access international stock markets. Their domestic affiliates have drummed up business inside China while the overseas entities operate apps or websites that give the mainland investors access to overseas shares.
The CSRC “plans to confiscate all illegal gains from the associated domestic and overseas entities of Tiger, Futu and Longbridge, while also imposing severe penalties,” according to official Chinese news service Xinhua.
Recovered Half of Friday’s Plunge
Shares in Tiger’s parent, UP Fintech Holding (TIGR), are up 14.8% in early Tuesday trade, having plunged 31.9% immediately after the start of trade on Friday.
Futu Holdings (FUTU) shares are up 17.6% early on Tuesday, after a 34.7% fall in early Friday trade.
After all the volatility, UP Fintech stock is 14.8% lower than before the CSRC announcement. Futu shares are net down 15.2%.
The Longbridge Securities entity is a subsidiary of Singapore-based fintech Longbridge Group. Neither company is listed.
Accepting Fines ‘With Sincerity’
In a statement to U.S. markets, Futu Holdings, which operates the Futubull and Moomoo trading platforms, revealed that it faces a fine of C¥1.85 billion ($273 million), with founder Li Hua paying an additional personal fine of C¥1.25 million ($184,000). The company says 13% of its total funded accounts are inside China, and says it will “fully cooperate” with the CSRC while safeguarding the interests of shareholders.
UP Fintech Holding issued a statement that it is being fined C¥308.1 million ($45.4 million) with another C¥103.1 million ($15.2 million) confiscated as illegal income. CEO Wu Tianhua has received the same personal fine of C¥1.25 million ($184,000). It also says it is “fully cooperating” with the authorities and “accepts the penalty with sincerity.” Mainland customers make up an estimated 10% of Tiger’s accounts.
Longbridge, which operates in the United States, New Zealand, Hong Kong and Singapore, didn’t disclose the size of the penalties it faces. But it said it would ensure an orderly transition, protect client assets, and “proactively notify” affected clients.
Knock to Alibaba Shares and More
The impact of the fines and suspension of the international apps is knocking U.S. listings that are popular with Chinese investors.
Alibaba Group Holding (BABA) (HK:9988) shares dropped 3.4% at the start of trade Friday. They have not bounced back today, unlike the Chinese brokerages.
Rival e-commerce platform JD.com (JD) (HK:9618) shares fell an initial 4.2% on Friday, and continue to drift south today.
The Temu app operator PDD Holdings (PDD) fell an initial 5.1% on Friday but have largely recovered the lost ground, and are up 3.1% on Tuesday.
We also saw a drop in targeted exchange-traded funds that invest into China. The KraneShares CSI China Internet ETF (KWEB) fell 4.4% on Friday and have recovered about half the lost ground.
Dual listings that are also listed in Hong Kong should not see a long-lasting impact, since mainland Chinese investors can typically access the Hong Kong listing via the Stock Connect.
The KraneShares Hang Seng Tech Index ETF (KTEC), which tracks Chinese tech listings in Hong Kong, dipped 2.0% at the start of Friday but is back at the level of last Wednesday’s close.
Tight Restrictions on Mainland Stocks, Currency
Mainland China has incredibly strict rules on securities trading as well as cross-border transfers of the Chinese yuan. Such rules don’t apply in Hong Kong, where the Hong Kong dollar trades freely and international investors are free to buy and sell securities as they choose, just as the U.S. dollar trades freely and Wall Street is accessible to international buyers.
What has recently changed is that the Beijing government is attempting to apply Chinese securities law outside China’s borders. It is looking to expand Chinese stock rules even to “Chinese” companies that move their headquarters abroad, or Chinese companies that, for example, create an offshore Cayman Islands entity to list in the United States.
The CSRC first took aim at overseas platforms that target mainland business on December 30, 2022. At that time, the stock watchdog barred Futu Holdings and UP Fintech Holding from registering new users in mainland China and seeking further investment. But the existing business was allowed to continue with limited fund transfers.
Two-Year ‘Rectification’ Program
Alongside the punishment of the three brokerages, China’s State Council approved a “joint implementation” plan for the CSRC and seven other government departments to cooperate to “comprehensively eradicate” illegal securities trade over a two-year “rectification” timeframe.
The two-year period is intended to give brokerages the opportunity to wind up overseas operations. During that period, China’s regulator says the overseas brokerages are “strictly prohibited” from facilitating new buy orders or capital inflows. They are allowed only to complete sell orders and capital withdrawals.
At the end of the two years, the overseas brokerages must shut down websites, trading apps and servers aimed at supporting mainland Chinese customers.
Mainland Chinese investors are allowed to invest into Hong Kong stocks via the “Stock Connect” scheme linking the Hong Kong Stock Exchange with its counterparts in Shanghai and Shenzhen. But they would otherwise be unable to trade, for example, U.S. shares.
Mainland Chinese citizens have an official limit of $50,000 per person that they are allowed to transfer abroad, intended to pay overseas tuition or medical expenses. But Hong Kong banks and brokerages, Macau casinos and other mainland-focused businesses may take Chinese yuan from customers inside China, then issue them foreign currency abroad — for a cut and a fee, of course.
Stocks were not trading in Hong Kong and the United States on Monday, with markets closed for public holidays.
At the time of publication, McMillan was long KTEC.
