China Sets New Regulations on Offshore Trading

The China Securities Regulatory Commission (CSRC) has initiated an unprecedented move by inhibiting local brokerages and their offshore branches from taking on new mainland customers for offshore trading. This decision underscores China’s dedication to curbing capital outflows and stabilizing its currency.

Impact of New Rules on Brokerage Firms

A previously unreported notice from the CSRC’s Shanghai branch, dated September 28, 2023, declared these changes. There is no exact enforcement date; however, insiders speculate immediate implementation is underway. The notice also established an end-of-October deadline for removing apps and websites soliciting clients from the mainland.

The new regulations also encompass monitoring and limiting new investments by current mainland clients to circumvent potential breaches of China’s foreign exchange restrictions.

With the Chinese market exhibiting slower economic growth, an increase in overseas investments by Chinese citizens has been seen. These capital outflows are causing tension in the yuan’s exchange rate. The Chinese authorities actively seek to stabilize the currency and retain control over capital flows.

Brokerage firms, especially those with substantial offshore trading activities, are predicted to be impacted by the notice. Big state-owned firms like Citic Securities, the China International Capital Corporation, and Haitong Securities are among them. These companies operate significant Hong Kong-based units, and most of their revenue comes from offshore trading services. At the time of the report publication, these brokerages did not respond to requests for comments from Reuters.

Previous Offshore Trading Measures in China

It is not the first regulatory action related to offshore trading and investments. Earlier this year, two online brokerages, Futu Holdings Ltd and UP Fintech Holding Ltd, pulled their apps in China voluntarily due to data security and capital outflow concerns, aligning with Beijing’s tighter controls.

Chinese individuals can continue investing in offshore securities through existing channels despite the new restrictions. These include the Stock Connect program with Hong Kong and quota-governed schemes like the qualified domestic institutional investor and the qualified domestic limited partnership programs. China’s commitment to exerting stronger control over capital outflows and maintaining stability in its financial markets is underscored by these new measures.

The financial industry will observe the repercussions of these restrictions on offshore trading and investments in the coming months. The CSRC also refrained from commenting on Reuters’ request at the time of the report’s publication.