China has issued a notice that prohibits domestic brokerages and their overseas units from accepting new mainland clients for offshore trading. The notice also states that new investments by existing mainland clients will be “strictly monitored” to prevent investors from bypassing China’s foreign exchange controls. The move is meant to restrict capital outflows, as faltering growth for the world’s second-largest economy has spurred investment overseas, weighing on the yuan and prompting authorities to ramp up efforts to stabilize the currency.
The China Securities Regulatory Commission (CSRC) has instructed brokerages to stop offering securities trading from offshore accounts such as Hong Kong to new mainland investors. According to the notice, activities including cross-border securities broking, securities lending, fund sales, and investment consulting are now considered illegal.
The ban on offshore investments via domestic brokers comes after two online brokerages – Futu Holdings Ltd and UP Fintech Holding Ltd – in May announced the removal of apps in China amid Beijing’s sharpened focus on data security and capital outflows. Some Hong Kong units of Chinese brokerages had also stopped opening accounts for mainland clients following informal guidance from the CSRC aimed at discouraging illegal money outflows.
The use of offshore brokerage accounts in Hong Kong entails converting yuan to other currencies. Chinese individuals are still able to invest offshore either via the Stock Connect with Hong Kong or by using the quota-based qualified domestic institutional investor and the qualified domestic limited partnership programs. They can also use some foreign brokerage platforms outside mainland China if they have funds parked in offshore locations.
This move is expected to impact brokerage firms with larger offshore retail businesses, such as state-owned Citic Securities, CICC, and Haitong Securities. The three brokerages are yet to respond to requests for comment research notes from Hwabao Securities.