Khaberni - The founder of the Chinese electronic brokerage platform “Futu Holdings”, Li Hua, lost more than a quarter of his wealth in one day after a new campaign launched by China targeting cross-border stock trading, in a move aimed at tightening control over capital flows abroad and pushing investors towards official channels.
Li's wealth, the company's founder and CEO, fell by $1.7 billion to $4.7 billion as of Friday, according to Bloomberg's Billionaires Index, from $10.1 billion at the end of last October.
Most of Li's wealth comes from his stake in “Futu,” listed in the United States, which saw its shares drop by 28% on Friday, in the biggest daily drop in more than three years.
This decline came just months after “Futu” announced in March that it had benefited from a rebound in the market for initial public offerings in Hong Kong, stating at that time that more than half of the entities issuing in the city's IPOs had collaborated with it.
China imposes very strict restrictions on capital movement, allowing a Chinese citizen to transfer an amount not exceeding $50,000 annually abroad, with specific conditions that usually do not include direct investment in foreign stocks. Beijing aims with this to direct the savings of the Chinese to support the local economy and companies.
Broad fines
Li is one of the founders of brokerage firms who have amassed large fortunes as a wide segment of China's population turns to investing in stocks.
The Chinese Securities Regulatory Commission said it intends to punish “Futu,” “Tiger Brokers,” and “Long Bridge Securities” for operating in mainland China without a license.
“Futu” later stated that the regulators had proposed imposing fines on it amounting to about 271 million dollars, while “Up Fintech Holding,” the owner of “Tiger Brokers,” said that it faces fines and income confiscation totaling 411 million yuan (about 60 million dollars).
CITIC Securities estimates assets ranging from 150 billion to 180 billion Hong Kong dollars (about 19 to 23 billion dollars) at “Futu” will be affected by the campaign, while “Tiger Brokers” represents other assets ranging from 45 billion to 50 billion Hong Kong dollars.
Another estimate by “CITIC Securities” said that the campaign could affect assets up to 250 billion Hong Kong dollars (about 32 billion dollars) in Hong Kong, with “Futu” alone holding the larger share of these assets.
According to data compiled by Bloomberg, “Futu” covered 30 initial public offerings in Hong Kong this year, more than any other bank.
Investor options
Chinese investors are scrambling to find alternative ways to buy and sell foreign stocks, following the launch of Beijing's harshest campaign yet on “illicit” cross-border stock trading aimed at curbing the outflow of capital.
Bloomberg quoted Richard Wang, an employee in the field of artificial intelligence in the United States who owns stock holdings worth about $120,000 at “Futu,” saying that he sold his American stocks on Friday following China's move to close loopholes in capital controls, and is waiting for the Hong Kong market to reopen on Tuesday to sell his remaining positions.
Bloomberg quoted Wang as saying that China is concerned about further capital outflows, so it is closing the cross-border trading channel and forcing money back into the local markets, adding "that's why I exited."
The surprise led to swift reactions on Friday, as the “Nasdaq Golden Dragon China Index” dropped by 2.2%, and more than a quarter of “Futu”’s market value evaporated.
Bloomberg estimates indicate that about a trillion dollars of “hot money” exited China last year, in the largest annual outflow abroad since records began in 2006.
The term “hot money” refers to money that moves between financial markets, countries, and banks in search of a better investment return following interest rate movements.
Background of the campaign
The new campaign represents an escalation of a course that began in late 2022, when China asked electronic brokerage firms to correct “illegal” business activities and stop opening new accounts for investors inside the mainland, indicating Beijing's impatience with cross-border flows outside regulated channels.
While Chinese authorities then allowed electronic brokerage companies to continue serving current customers, they ordered on Friday the liquidation of all existing "illegal" accounts within two years.
Beijing says these measures aim to clean up the capital market and guide investors towards regulated channels for investing abroad, such as the connection mechanism with the Hong Kong Stock Exchange and local qualified institutional investor programs.
The campaign coincides with a growing effort in recent years to tax residents in China on their foreign income, including stock trading profits abroad, at a time when the country is trying to bolster its financial resources following a decline in land sale revenues and an accumulation of local government debts.
Bloomberg quoted a lawyer at “Gowin-Win Partners,” Dong Yichi, saying that many people continue to bet on there being room for maneuver or ways to circumvent the new rules, such as marriage arrangements with non-Chinese.
