HONG KONG, Oct 12 (Reuters) – China has for the first time issued a notice banning domestic brokers and their overseas units from accepting 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 circumventing China’s foreign exchange controls, the announcement said. The news was first reported by Reuters.
The measures, which will curb capital outflows, come as faltering growth in the world’s second-largest economy has spurred foreign investment, weighing on the yuan and prompting authorities to step up efforts to stabilize 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 rose amid interest rate differentials and global geopolitical uncertainty.
This has forced the authorities to unveil a slew of measures in recent months to halt its decline.
The China Securities Regulatory Commission (CSRC) told brokers to stop offering trading in securities 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 brokerage, securities lending, fund sales and investment advice, according to the notice.
The CSRC said in a statement late Thursday that it had launched “standardization and remedial work” in January on the illegal expansion of cross-border business by overseas branches of brokerage firms.
The latest regulatory requirement is a continuation of that work, and the notice issued last month mainly clarified “some specific requirements and has no material changes,” Reuters said after the story was published.
The CSRC’s duty is to remedy “illegal cross-border” securities transactions and this has “no direct relationship to the strengthening of foreign exchange controls referred to in the report”, the regulator added.
It was not clear when the CSRC’s new guideline for domestic brokers was effective, but sources said they believed the regulator meant immediate effectiveness.
The end of October was set as the deadline to remove apps and websites soliciting clients from the mainland, the notice also said, adding that offline channels for opening accounts should also be shut down.
The sources declined to be named because they were not authorized to speak to the media.
“We believe the main purpose of the policy is to curb capital outflows, especially in the face of pressure to depreciate the yuan,” said Shujin Chen, head of China financial and equity research at Jefferies.
“From an industry perspective, the impact will be greater on brokerage firms with larger offshore retail.”
For brokerage firms such as state-owned Citic Securities ( 600030.SS ), CICC ( 3908.HK ) and Haitong Securities ( 600837.SS ), ( 0665.HK ), offshore trading services are a key source of income for their Hong Kong Units.
The three brokerages did not immediately respond to Reuters requests for comment.
FROM NARROW GUIDANCE TO A BIG PROHIBITION
The ban on offshore investment through domestic brokers comes after two online brokerages – Futu Holdings Ltd and UP Fintech Holding Ltd – announced in May that they were removing apps in China amid Beijing’s heightened focus on data security and capital outflows.
The CSRC said last December that the two brokers operated cross-border securities trades involving domestic investors without regulatory approval. In a statement on Thursday, it reiterated that their offshore businesses had violated securities laws.
Earlier this year, Shanghai brokerage Guotai Junan received a similar informal instruction, a source familiar with the matter told Reuters.
Some Hong Kong units of Chinese brokerage firms have also stopped opening accounts for mainland clients following informal guidance from the CSRC aimed at discouraging illegal money outflows, state media reported in February.
Using offshore brokerage accounts in Hong Kong means converting yuan to other currencies.
Chinese individuals are still able to invest offshore either through Stock Connect with Hong Kong or through the quota-based Qualified Domestic Institutional Investor and Qualified Domestic Limited Partnerships programs.
They may also use some foreign brokerage platforms outside of mainland China if they have funds parked in offshore locations.
A total of 27 listed Chinese stockbrokers have established offshore units by the end of 2022, with the largest providing offshore trading services for mainland investors, according to a research report by Hwabao Securities.
Report by Selena Li and Summer Zhen; More news from Julia Zhu; Editing by Sumeet Chatterjee, Edwina Gibbs and Susan Fenton
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