In a move that underscores China's increasing scrutiny over capital outflows and its commitment to stabilizing its currency, the country has issued a directive prohibiting domestic brokerages and their overseas units from accepting new mainland clients for offshore trading. This unprecedented step has been confirmed by multiple sources and is based on an official document that was recently made available to Reuters.
The China Securities Regulatory Commission (CSRC), in a notice dated September 28th issued by its Shanghai unit, instructed brokerages to cease offering securities trading from offshore accounts, such as those in Hong Kong, to new mainland investors. This notice, which had not been previously reported, is believed by sources to be effective immediately, though the exact date of enforcement remains unclear. Furthermore, brokerages have been given an end-of-October deadline to remove apps and websites that solicit mainland clients.
This directive is not just limited to preventing new offshore accounts. Existing mainland clients who have investments offshore are also under the radar. Their new investments are to be "strictly monitored" to ensure that there are no attempts to bypass China's stringent foreign exchange controls.
The backdrop to this regulatory tightening is China's slowing economic growth. As the world's second-largest economy experiences decelerating growth, there has been a surge in overseas investments. This has put pressure on the yuan, leading authorities to take measures to stabilize the currency.
The implications of this notice are profound, especially for large brokerages. State-owned giants like Citic Securities, CICC, and Haitong Securities, for whom offshore trading services are a significant source of revenue for their Hong Kong units, are expected to be most affected. When reached out for comments, these brokerages did not immediately respond.
It's worth noting that this isn't the first time China has taken steps to regulate offshore investments. Earlier in May, two online brokerages, Futu Holdings Ltd and UP Fintech Holding Ltd, announced the removal of their apps in China. This decision was in response to Beijing's increased focus on data security and capital outflows.
For Chinese individuals keen on investing in offshore securities, there are still avenues available. They can either use the Stock Connect with Hong Kong or opt for quota-based schemes such as the qualified domestic institutional investor and the qualified domestic limited partnership programs. However, the use of offshore accounts in places like Hong Kong typically involves converting the yuan to other currencies, a process that is now under increased scrutiny.
This latest move by China is indicative of its broader strategy to have tighter control over its financial systems and to ensure that its currency remains stable amidst global economic uncertainties.
