China Calls on Cross-Border Brokers to End 'Illegal' Practices

China has asked two cross-border brokerages to rectify their “illegal” business activities, sending depositary receipts of Tencent Holdings Ltd. - backed Futu Holdings Ltd. tumbling. This comes as a blow to the company, which had been enjoying a period of growth and expansion.

The China Securities Regulatory Commission (CSRC) said in a statement on Friday that it would ask Futu and Up Fintech Holding Ltd. to stop taking on new onshore investors as customers or opening new accounts for them. Existing onshore clients can still trade via the brokerages, but additional fund transfers via non-compliant channels to their accounts will be banned, the CSRC added.

The two firms had been conducting cross-border securities trading business without approval from the CSRC, the regulator said. Their act has constituted illegal operation of securities business according to the Securities Law and related regulations.

Futu's ADRs fell sharply in premarket trading in New York, with shares down as much as 30%. Up Fintech shares also plunged, falling as much as 35%.

Futu and Up Fintech, which is known as Tiger Brokers, have been operating in a gray area for their mainland China businesses, allowing millions of local investors to evade capital controls to trade shares in markets such as Hong Kong and New York. A senior central bank official has questioned the legitimacy of online trading firms, calling their services “illegal” at least twice since 2021.

While it is unclear if these online trading firms are breaking any laws, the senior central bank official’s statements suggest that they may be operating outside of the bounds of what is legal. This could have serious implications for their businesses, and for the investors who are using their services.

The criticism had prompted the companies to shift their focus away from the domestic market even before Friday’s regulatory order. Tiger Brokers was resorting to job cuts and Futu was eying overseas markets to diversify its growth. This change in focus may have come too late, however, as the new regulations could severely hamper the companies' ability to compete in the domestic market.

Futu abruptly postponed its Hong Kong listing less than a day before its scheduled debut on Friday, saying it was "clarifying certain matters" without elaborating.

In November of last year, the market regulator summoned executives from two firms in order to rectify cross-border stock trading business targeting domestic investors. The CSRC stated that they will dispatch a task force to supervise rectification work at both firms and take further measures as appropriate.

After China tightened its grip on the online education industry, it came under scrutiny from Beijing. This is just one of the many signs that the Chinese government is not yet ready to let up on its crackdown of the private sector.