By Selena Li and Summer Zhen
HONG KONG (Reuters) -China has for the first time issued a notice prohibiting domestic brokerages and their overseas units from taking on new mainland clients for offshore trading, according to an official document seen by Reuters and confirmed by four sources.
New investments by existing mainland clients are also to be “strictly monitored” to prevent investors from bypassing China’s foreign exchange controls, said the notice. The news was first reported by Reuters.
The actions, which will restrict capital outflows, come 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 stabilise the currency.
The yuan, one of Asia’s worst-performing currencies, has weakened 5.5% this year as China’s post-pandemic recovery quickly lost steam and the dollar climbed due to interest rate differentials and geopolitical uncertainty globally.
That has forced authorities to unveil a slew of measures in recent months to stem its decline.
The China Securities Regulatory Commission (CSRC) has told brokerages to stop offering securities trading from offshore accounts such as Hong Kong to new mainland investors, according to a Sept. 28 notice issued by its Shanghai unit.
Activities now considered illegal include cross-border securities broking, securities lending, fund sales and investment consulting, according to the notice.
The CSRC said in a statement late on Thursday that in January it initiated “standardization and rectification work” on illegal cross-border business expansion of overseas subsidiaries of brokerages.
The latest regulatory requirement is a continuation of that work, and the notice issued last month mainly clarified “some specific requirements and has no substantive changes”, it said after the publication of Reuters story.
It’s the duty of the CSRC to rectify “illegal cross-border” securities transactions, and that has “no direct relationship with the strengthening of foreign exchange controls the report refers to”, the regulator added.
It was not clear when the CSRC’s new directive to domestic brokerages was effective, but the sources said they believed the regulator meant effective immediately.
An end of October deadline has been set for the removal of apps and websites soliciting mainland clients, the notice also said, adding that offline channels for opening accounts should also be shut down.
The sources declined to be named as they were not authorised to speak to the media.
“We believe the main policy purpose is to curb capital outflows, especially in the context of yuan depreciation pressure,” said Shujin Chen, head of China financial and property research at Jefferies.
“From an industry perspective, the impact will be greater on brokerage firms with larger offshore retail business.”
For brokerages such as state-owned Citic Securities, CICC and Haitong Securities, offshore trading services are a key source of revenue for their Hong Kong units.
The three brokerages did not immediately respond to Reuters requests for comment.
FROM NARROW GUIDANCE TO BIG BAN
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.
The CSRC last December said the two brokerages had operated cross-border securities businesses involving domestic investors without regulatory consent. In its Thursday statement, it reiterated their offshore businesses violated securities laws.
Earlier this year, Shanghai brokerage Guotai Junan received a similar informal instruction, a source with knowledge of the matter told Reuters.
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, state media reported in February.
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 programmes.
They can also use some foreign brokerage platforms outside mainland China if they have funds parked in offshore locations.
A total of 27 listed Chinese securities brokerages had set up offshore units by the end of 2022 with the largest ones conducting offshore trading services for mainland investors, according to a research note from Hwabao Securities.
(Reporting by Selena Li and Summer Zhen; Additional reporting by Julie Zhu; Editing by Sumeet Chatterjee, Edwina Gibbs and Susan Fenton)