The Chinese Securities Regulatory Commission (CSRC) announced yesterday (May 22) that it has heavily penalized three overseas Chinese-funded securities firms, including Tiger Securities, Futu Securities, and Changqiao Securities. The official statement indicated that Tiger, Futu, and Changqiao were engaged in extremely irregular operations, leading to the confiscation of assets and illegal gains in staggering amounts. Tiger and Futu alone were fined a total of 2.3 billion yuan each.
According to the announcement by the CSRC on May 22, Tiger Securities (New Zealand) Limited, Futu Securities International (Hong Kong) Limited, and Changqiao Securities (Hong Kong) engaged in securities trading marketing and transaction processing activities within China without approval or relevant business licenses, violating Chinese securities laws and regulations and disrupting market order.
The CSRC, along with other government departments such as the Ministry of Industry and Information Technology and the Ministry of Public Security, jointly issued an implementation plan to “comprehensively crack down on the illegal cross-border operations of overseas securities, futures, and fund management institutions” within two years.
During the period of concentrated rectification, overseas institutions are prohibited from providing illegal services such as facilitating buy transactions or fund transfers for existing investors within the country. Only sell transactions and fund withdrawals are allowed. After the rectification period, overseas institutions must completely shut down their domestic websites, trading software, and associated servers, and are prohibited from providing trading services for existing investors within the country.
Tiger, Futu, and Changqiao are all cross-border internet securities firms serving investors in mainland China. Their main business model involves using licenses from Hong Kong or other overseas locations to provide services such as stock trading, account opening, and fund transfers for mainland Chinese individuals. Over the past few years, they have attracted a large number of middle-class investors and young retail investors from China.
Following the release of the news, Tiger Securities and Futu Holdings both saw significant drops in their stock prices in the pre-market trading of US stocks, with Tiger Securities plunging by 45% and Futu Holdings plummeting by over 30%.
American economist David Huang told Dajiyuan that Beijing’s crackdown on illegal cross-border financial activities is ostensibly aimed at maintaining market order and protecting investors under the securities law. However, in essence, it targets internet securities firms that help residents transfer funds to overseas stock markets, closing off channels through which funds could flow out without official supervision.
The Securities and Futures Commission of Hong Kong issued a notice yesterday, requiring licensed securities and brokerage firms in Hong Kong to enhance measures to combat document fraud and money laundering risks, and raise account opening standards. Three additional measures were also proposed for mainland Chinese investor accounts.
Huang explained that the Hong Kong Securities and Futures Commission is strengthening internal audits based on compliance and international anti-money laundering standards, but it is mainly an action to comply with regulatory requirements from the mainland government.
Public information shows that behind the three overseas Chinese-funded securities firms are emerging industry giants in China.
Futu Securities is primarily associated with Tencent. The biggest shareholder (with absolute control) is founder Li Hua (Tencent’s 18th employee); Tencent is currently the second-largest shareholder of Futu.
Tiger Securities, on the other hand, is backed by Xiaomi and Chinese background securities firms. The largest shareholder is founder Wu Tianhua (former NetEase Youdao), with Xiaomi Group as the strategic major shareholder, making Xiaomi the second-largest shareholder of Tiger. Other shareholders include Tang Binsen (Yuanqisenlin), Huachuang Capital, Zhen Fund, among others.
Changqiao Securities is a relatively young and innovative social trading securities firm, with a founding team boasting strong ties to the Alibaba ecosystem. The founders and management team primarily originate from Alibaba (technology experts Zhu Liangliang, Ma Changwei, etc.). A key strategic major shareholder is Yuanjing Capital, a well-known venture capital institution founded by Alibaba executive Wu Yongming.
In fact, on December 30, 2022, the CSRC had already taken action against Futu Securities, Tiger Securities, and other securities firms that involved cross-border operations. In May 2023, under pressure from the authorities, Futu Securities and Tiger Securities announced the removal of their apps within China.
Prior to this recent penalty, Futu Securities, Tiger Securities, Changqiao Securities, and Interactive Brokers had successively raised the online account opening requirements for mainland Chinese residents.
After the release of the CSRC’s penalty notice, Tiger Securities and Futu Holdings subsequently disclosed their proposed penalty amounts, both amounting to hefty fines. Futu proposed a fine of 1.85 billion, while Tiger Securities faced a penalty of 4.112 billion, totaling nearly 23 billion yuan.
Based on recent financial reports, excluding customer funds, Tiger has a reserve of 790 million US dollars, while Futu has 1.345 billion US dollars.
Xu Zhen, a senior figure in mainland capital circles, told Dajiyuan that based on the disclosed information so far, this action is a meticulously targeted hunt by the Chinese authorities against financial newcomers and the middle class. The Chinese Communist Party is in need of money. At the end of 2022, the business of the three cross-border securities firms was still small, with the Chinese authorities only drawing a line. By 2026, they had grown significantly. In recent days, the CSRC took action, confiscating gains and issuing fines, generating substantial income for the government.
Xu Zhen stated that the Chinese authorities have at least three intentions: first, Tencent stands behind Futu, Xiaomi supports Tiger, and Changqiao is linked to Alibaba, indicating they are well-funded. Second, the middle-class in China are the main investors in these three securities firms, having enjoyed high returns on US stocks in recent years and are required to pay a 20% capital gains tax. Third, under the guise of preventing capital outflows, the authorities are pushing overseas investments back to the A-share market, allowing state-owned entities to act as market rescuers, potentially leading to substantial gains for the government. “With these three sources of money, the Chinese government can alleviate some financial pressures, which has been their strategy in recent years.”
Additionally, Xu Zhen remarked that the timing of the crackdown was chosen because the CSRC, the State Taxation Administration, and the Public Security Bureau’s technical capabilities in regulation have matured. In recent years, the Chinese regulatory system has significantly strengthened, utilizing comprehensive oversight, big data account identification, fund tracking, CRS tax information exchange, and anti-money laundering coordination, making it easier to trace the full chain of transactions from account opening to trading and increasing the likelihood of centralized law enforcement.
The penalties imposed on the three overseas Chinese-funded securities firms have sparked heated discussions among netizens on overseas platforms: “Is there no consensus between China and the US on financial matters?” “Closing the door to prevent capital outflow.” “Without border control, it’s just a paper tiger. The thunder is loud, but the raindrops are small. The big investors’ money is returned as is, while the people get a small cut. Letting the bullets fly is truly a classic.” “We always knew this day would come. The pighead (Xi) continues to run to his end.”