China Traders Flee Amid Cr Crackdown on Cross-Border Capital Flows

China Cracks Down on Illicit Cross-Border Stock Trading

Beijing has launched its most forceful crackdown on illicit cross-border stock trading to stem capital outflows, prompting Chinese investors to rush to find alternative ways to buy and sell overseas equities. The surprise move has triggered swift reactions on the markets, with the Nasdaq Golden Dragon China Index slumping 2.2% on Friday.

According to an index compiled by Bloomberg Intelligence, an estimated $1 trillion of so-called "hot money" flowed out of China last year, the biggest annual outflow since data began in 2006. The clampdown could affect as much as HK$250 billion of assets in Hong Kong, with Futu Holdings Ltd. alone accounting for around HK$150 billion to HK$180 billion. Futu underwrote 30 initial public offerings (IPOs) in Hong Kong this year, more than any other bank.

The China Securities Regulatory Commission, the nation's top securities watchdog, slapped more than $330 million in combined fines on Futu, Up Fintech Holding Ltd.'s Tiger Brokers, and Longbridge Securities for operating on the mainland without a license. The fines were imposed on Friday, and investors like Daisy Qin have been left scrambling to find workarounds. Qin, a bank employee in Chengdu, said she opened an account with Futu last year using falsified documentation and now plans to dump her 2 million yuan worth of shares.

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The crackdown marks an escalation from late 2022 when China ordered online brokers to rectify illegal business activities and stop onboarding new onshore investors. The move has also triggered a shift in client behavior, with some investors preparing to move to other brokers in Singapore or the US. However, others are choosing to sell their holdings and exit immediately to avoid risks.

Banks are already picking up the slack, with some clients shifting their trading of offshore stocks to firms such as Bank of China's Hong Kong branch or HSBC Holdings Plc. Investors don't need to sell their holdings as the accounts can be moved via a custodian transfer, said Allen Wang, a Shanghai-based partner at Jincheng Tongda & Neal Law Firm.

While Chinese authorities have said the measures are designed to clean up the capital market and steer investors toward regulated channels for overseas investment, some experts believe the campaign marks an intensifying drive to tax residents on overseas income. China's been trying to beef up its fiscal coffers as land sales revenue dried up and local governments are debt-laden due to excessive borrowing.

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For Chen Li, chief executive officer of Soochow Securities Financial Holdings Ltd., forcing the assets back to official channels such as Hong Kong's stock connect and Qualified Domestic Institutional Investor schemes will make it much easier to tax citizens on their overseas assets. Moreover, it sets the ground for potentially more financial opening.