The end of a regulatory grey zone: Why China is cracking down on offshore brokerages

The end of a regulatory grey zone: Why China is cracking down on offshore brokerages

China’s toughest crackdown yet on offshore brokerages is closing a popular route to overseas markets for mainland investors. Analysts say the move is about more than investor protection.

SHENZHEN: When China unveiled its toughest crackdown yet on offshore trading platforms, Beijing-based investor Elaine Liang began exploring alternatives.

“The first thing I worried about was whether the trading restrictions would come immediately,” said the 30-year-old finance industry researcher, who has used Hong Kong-based brokerage app Futu since studying in the city several years ago.

Her dilemma is shared by many mainland Chinese investors following a sweeping campaign launched by the China Securities Regulatory Commission (CSRC) and seven other agencies on May 22.

The crackdown targets offshore brokerage platforms including Futu, which owns online platform MooMoo, and other widely used overseas trading apps like Tiger Brokers and Longbridge - both headquartered in Singapore.

Under the new measures, mainland clients using these platforms can only sell existing holdings and withdraw funds. They can no longer buy new securities or transfer money into accounts.

The goal is to “completely eradicate” illegal cross-border securities activity over the next two years, regulators said - a move that marks Beijing’s most aggressive move yet against a fast-growing route used by mainland Chinese investors to access overseas markets.

While regulators said the crackdown is aimed at protecting investors and curbing illegal financial activity, analysts said it also reflects Beijing’s broader effort to tighten oversight of outbound capital flows and channel overseas investing back through state-approved channels.

“So I think this is more about reasserting state control over financial plumbing,” said Lizzi C Lee, a fellow on the Chinese economy at the Asia Society Policy Institute’s (ASPI) Center for China Analysis.

WHAT IS CHINA TARGETING?

Chinese authorities are not banning overseas investing outright.

Instead, regulators are targeting offshore brokerages they said have been illegally conducting cross-border securities, futures and fund business.

Futu, Tiger Brokers and Longbridge were among the firms specifically named and targeted for penalties by state regulators, though the campaign extends beyond those three companies.

The latest measures prohibit mainland investors from transferring new funds or opening new trading positions. Existing holdings can still be sold and funds withdrawn during the transition period.

Analysts said the crackdown reflects Beijing’s growing discomfort with what had become a regulatory “grey zone”.

“For years, Beijing tolerated a degree of ambiguity around cross-border internet brokerages because they helped meet investor demand during a period when China’s official outbound investment channels were very quota-constrained and narrow,” said Asia Society’s Lee.

“But regulators seem to now see these platforms as unlicensed cross-border financial infrastructure operating outside the state’s supervisory perimeter.”

Lee added that regulators were now “explicitly framing these activities as illegal financial business and tying them to broader anti-money laundering and financial security concerns”.

CHINA’S MOST FORCEFUL CRACKDOWN YET

The latest campaign is widely seen as Beijing’s most forceful move yet against offshore brokerages.

In late 2022, regulators banned unauthorised brokers from onboarding new mainland investors, while their apps were later removed from mainland app stores in 2023.

Existing users were largely unaffected and many investors continued trading through older accounts.

This time, however, Chinese state regulators are directly targeting existing accounts and imposing a two-year rectification timeline.

The proposed penalties are also sizeable.

Futu faces fines and confiscations worth around 1.85 billion yuan (US$272.87 million), while Tiger Brokers could face penalties exceeding 400 million yuan.

Tiger Brokers said it would fully cooperate with regulators and implement rectification measures, while Futu said the proposed penalty remained subject to further procedures and a final CSRC decision.

Longbridge said it would comply with the relevant rectification requirements.

The regulatory action has also raised questions about the overseas operations of the affected brokerages, including their Singapore units.

Kenneth Goh, director in private wealth management at UOB Kay Hian, told CNA that the Singapore arms of these firms are “separately licensed by the Monetary Authority of Singapore (MAS) and operate under Singapore law”.

“Chinese action targets their parent groups for cross-border activity into mainland China without Chinese approval. The Singapore arms are not the subject of that action,” Goh said.

He added that MAS rules require client money to be “kept separate from company funds”.

“MAS itself has said that the Singapore companies are financially independent of the group entities targeted in China,” Goh added.

Investor concerns also spilled into markets.

Shares of Futu Holdings and UP Fintech, the parent company of Tiger Brokers, plunged more than 30 per cent in pre-market trading on May 22 following the announcement.

The move also comes against the backdrop of China’s broader capital controls regime, where outbound investing remains tightly regulated despite gradual financial opening.

Under current rules, mainland residents face an annual foreign exchange quota of US$50,000 (338,987.50 yuan).

Authorities remain sensitive to large-scale capital outflows after the 2015 to 2017 period, when yuan depreciation pressure triggered significant money leaving the country and led regulators to tighten scrutiny over outbound flows.

Analysts said Beijing is now trying to steer overseas investing back into regulated and state-approved channels.

Yet the popularity of offshore brokerages highlights a ch