China has issued a notice, marking the first time, that restricts domestic brokerages and their overseas units from accepting new mainland clients for offshore trading, according to an official document viewed and confirmed by four sources.
The notice also emphasizes “strict monitoring” of new investments by existing mainland clients to prevent them from circumventing China’s foreign exchange controls. These measures have been implemented to curb capital outflows and come at a time when China’s economic growth has been slowing, leading to increased overseas investments, which have put pressure on the yuan and prompted authorities to take steps to stabilize the currency.
The yuan has depreciated by 5.5% this year, partly due to China’s post-pandemic recovery slowdown and a strengthening US dollar influenced by interest rate disparities and global geopolitical uncertainties. As a result, authorities have introduced a series of measures in recent months to counteract its decline.
According to a notice issued by its Shanghai unit on September 28, the China Securities Regulatory Commission (CSRC) has instructed brokerages to cease offering securities trading to new mainland investors from offshore accounts, such as those in Hong Kong.
The prohibited activities now include cross-border securities brokering, securities lending, fund sales, and investment consulting. The directive’s effective date is not specified, but sources believe that the regulator intended for it to be implemented immediately.
The notice also sets an end-of-October deadline for removing apps and websites that solicit mainland clients, while offline channels for account openings should also be closed down.
Shujin Chen, head of China financial and property research at Jefferies, noted, “We believe the main policy purpose is to curb capital outflows, especially in the context of yuan depreciation pressure.” He further explained that this move will have a more significant impact on brokerage firms with substantial offshore retail business.
For brokerages like state-owned Citic Securities, CICC, and Haitong Securities, offshore trading services represent a vital revenue source for their Hong Kong units. The ban on offshore investments through domestic brokers follows earlier actions taken against online brokerages Futu Holdings Ltd and UP Fintech Holding Ltd, who removed apps in China due to heightened concerns about data security and capital outflows.
Chinese individuals can still invest offshore through the Stock Connect with Hong Kong or via quota-based programs like qualified domestic institutional investor and qualified domestic limited partnership. They can also use foreign brokerage platforms outside mainland China if they have offshore funds.
As of the end of 2022, 27 listed Chinese securities brokerages had established offshore units, with the largest ones providing offshore trading services for mainland investors, according to Hwabao Securities research.