A Chinese central banker warned that online brokerages not licensed in China are acting illegally if they serve Chinese clients via the Internet, sending New York-listed shares of Futu Holdings Ltd (FUTU.O) and UP Fintech Holding sharply lower.
“Cross-border online brokerages are driving in China without a driver’s license. They’re conducting illegal financial activities,” Sun Tianqi, head of the Financial Stability Department of the People’s Bank of China (PBOC), said in a speech, according to a transcript released on Wednesday.
Shares of the two firms had already tumbled since Oct. 14, when the official People’s Daily said in an analysis on its website that Futu and UP Fintech face regulatory risks as China’s new personal data privacy law takes effect on Nov. 1.
Investors are concerned that the sector will be next in Beijing’s regulatory crosshairs, after China launched a flurry of crackdowns targeting sectors ranging from technology to cryptocurrency and real estate.
Investors need to see whether the Chinese government will restrict domestic individuals from opening an account at an offshore bank, and whether they can use this account to open a trading account with offshore brokers like Futu, Jefferies said in a note.
Jefferies added that many Chinese securities firms have set up their offshore subsidiaries to provide Hong Kong or U.S. trading services to domestic individuals, and foreign brokers including Interactive Brokers Group Inc (IBKR.O) also accept mainland Chinese clients, so “we need to wait for more guidelines from the regulators”.
The speech by the PBOC official threatens to further dent foreign investors’ confidence in Chinese tech firms, said an institutional investor in UP Fintech, who declined to be named.
Without identifying the firms, Sun said that 80% of accounts of a brokerage registered in the Cayman Islands were opened by mainland clients, while the ratio is 55% for another Hong Kong-registered brokerage.
The transcript of Sun’s speech was released on the website of the Finance 40 Forum, which organised the summit.
Futu said it does not believe it engages in securities brokerage business in China by redirecting users and clients to open accounts and make transactions outside China, but said there were regulatory risks.