‘China’s Robinhood’ brokerages are next targets in tech crackdown

China’s crackdown on the tech industry has reached the fast-growing online securities sector, with shares in Futu Holdings and Up Fintech Holding both suffering a major blow in the U.S. following abrupt criticism from Chinese authorities.

Amid regulatory uncertainties, mainland investors are having difficulties in remitting money in their offshore securities trading accounts back to their mainland bank accounts.

In an online article published in mid-October, the People’s Daily, the official newspaper for the Chinese Communist Party, warned that online brokerages operating across borders could violate user privacy and face regulatory risks. The piece explicitly named both Futu and Up Fintech – companies widely seen as the Chinese answer to the popular U.S.-based platform Robinhood.

Sun Tianqi, head of the Financial Stability Bureau under the People’s Bank of China, also pointed out at a financial forum in late October that some offshore securities institutions do not have a relevant license in China but offer trading in offshore markets to onshore investors.

“Cross-border internet brokerages are essentially driving in China without a driver’s license. They are conducting illegal financial activities,” he said.

Futu, backed by Chinese internet services giant Tencent Holdings, and Up Fintech, backed by smartphone maker Xiaomi, give mainland investors access to stocks listed in Hong Kong and the U.S. They have quickly expanded their customer base largely thanks to cheap fees.

China restricts trading in offshore stocks, and its financial authorities in 2016 flagged services offered by Futu and similar companies as problematic. Authorities stated that apart from qualified domestic institutional investors and the Stock Connect channels, they have not approved any institutions to provide services for domestic investors to participate in offshore securities trading.

Despite the warnings, Futu serves Chinese who already have an offshore bank account. Users of social media have also widely shared the information that some client managers help mainland investors convert onshore yuan to foreign currencies and transfer directly to their brokerage accounts.

Investing in overseas stocks from the mainland using foreign currency transfers and other tools had long been considered a legal gray zone. But these businesses were relatively small then, and the issue did not garner much attention.

The sector has changed dramatically since. Regulatory concerns over online brokerages have been increasing, given their rapid growth and larger market share. Futu has tripled its users in the last year and now has over 1 million customers with assets in their trading accounts. A U.S. investment bank, Jefferies, estimated that 35% of Futu’s paying clients came from mainland China as of June 2021 and that 20% of its paying clients newly added in the second quarter of this year came from the mainland.

China, which put a new data privacy law into effect on Monday, worries that online brokerages could leak customer information overseas. Since Futu and Up Fintech are listed on Nasdaq, authorities may be concerned that trading records and other financial data are making their way to the U.S.

Futu’s stock price fell 41% at one point to about a quarter of its February high after the People’s Daily article was published.

Chairman and CEO Li Hua said Futu holds business licenses in Hong Kong and its business model is no different from those of other banks and securities institutions with similar licenses in Hong Kong. He added that with sufficient capital, there is no risk of bankruptcy.

But the company is expected to suffer a major blow. Morgan Stanley has more than halved the price target for Futu, citing a potential regulatory crackdown on the brokerage’s business from onshore clients.

Chinese financial authorities have not properly addressed cross-border online trades so far, leaving room for interpretation on how offshore institutions should work with mainland customers.

Some Up Fintech customers expressed worries on social media over being unable to transfer invested funds back to the mainland, as their requests had been rejected by domestic banks.

“If Up Fintech is shut down by the authorities, what should I do with the money in the trading account?” one netizen asked.

Recent developments have also sent shock waves through Hong Kong, the offshore financial hub for mainland China. Local securities dealers hope to seek clarification from mainland authorities on whether the problem lies in the account-opening process, cross-border remittances or offshore stock trading itself.

Jefferies’ equity analyst Shujin Shen warned of potential regulatory risks facing cross-border online brokerages. China’s crackdown could easily extend beyond Futu and Up Fintech.

“It is still unclear how regulators will deal with major cross-border online brokers, and how China sees penetration and competition from foreign online brokers such as Interactive Brokers and Robinhood,” she said.

Authors: TAKESHI KIHARA, STELLA WONG, NIKKEI Asia

You might also like