China's Crackdown On Online Foreign Trades Will Increase Capital Flight

Authored by Anders Corr via The Epoch Times,

The regime in China imposed a crackdown against three online brokers that serve mainland Chinese clients by facilitating their foreign securities trades.

The crackdown worries the Hong Kong financial industry with the threat of harming liquidity, initial public offerings (IPOs), and cross-border capital flows in the world’s top capital market for the first quarter of 2026. An estimated $1 trillion of “hot money” seeking short-term investments in high-interest assets flowed out of China in 2025.

The firms are Tiger Brokers, Futu Holdings, and Long Bridge Securities, which together hold as much as $32 billion in assets under management for mainland clients. The May 22 crackdown by the China Securities Regulatory Commission (CSRC), coordinated with other regime organs, is over the firms’ alleged facilitation of unregulated overseas trading, including stocks and cryptocurrencies. The regime confiscated “illegal gains” from the three firms. For two years, the mainland accounts in question are banned from making new purchases and are only allowed to sell their assets and withdraw funds.

The Chinese Communist Party (CCP) regulates international capital flows in an attempt to accumulate wealth in China and tax overseas investments. The controls apply to international transfers of foreign exchange above $50,000 per mainland Chinese per year. Regulators in Beijing are forcing the three brokers to sell many of their overseas assets, putting downward pressure on the firms’ share prices, on popular (among Chinese investors) overseas-listed Chinese companies, and on the Chinese and Hong Kong stock indexes.

The regime’s targeting of the firms seeks to force the flow of investment into official channels more easily regulated and taxed, including Hong Kong’s Stock Connect, Wealth Management Connect, and Qualified Domestic Institutional Investor (QDII) programs.

The first two only allow Hong Kong-listed securities, while QDII has quotas.

The crackdown comes approximately a year after at least some of the firms received increased interest in the Hong Kong IPOs of “star” Chinese companies and overseas transfers due in part to higher interest rates abroad.

Mainland investors are particularly interested in U.S. fixed income and equities.

Quantitative strategies, hedge funds, and gold are also popular. In response to growing demand for private wealth, brokers have increased their presence in Hong Kong, Malaysia, and Singapore.

Last June, Tiger reportedly planned to double the number of its employees in Hong Kong to target offshore Chinese wealth in the city. The company was founded twelve years ago in Beijing, but is now headquartered in Singapore. Last year, it employed 60 people in Hong Kong, where it began operations in 2022. Tiger’s assets under management were north of $50 billion, including in the United States, Australia, and New Zealand. The company’s parent firm, UP Fintech Holding, is U.S.-listed.

Tiger will likely pay about $60 million in fines and confiscated income to the regime. UP Fintech’s ADRs and Futu shares fell as much as 47 percent and 35 percent in premarket trading following news of the crackdown.

Insiders may have profited from the crackdown as buying of put options expiring on May 22 surged the day prior to the announcement to 600,000 shares of Futu alone. Gains on those shares led to paper gains of as much as 3,400 percent. This raises questions about insider risks to U.S. and other investors in public companies over which the CCP has so much control and foreknowledge.

The proposed fine for Futu is approximately $271 million, plus a personal fine of $184,000 for the company’s CEO. The Tiger CEO will likely pay about the same.

In August, Futu executives reportedly noted that high U.S. interest rates were driving client interest in fixed-income assets. The comment came in the context of reporting on the company’s growth, including through an eighth retail location in Hong Kong, as well as expansion in Malaysia and Singapore. The firm’s private wealth services are available to persons with at least $640,000 in investable assets, many of whom are considered part of China’s “new wealth” clients who often invest online. Futu is headquartered in Hong Kong but is U.S.-listed.

In 2022, the regime banned Futu and other such companies without mainland licenses from adding new mainland clients, though old clients could still trade, and some new clients could evade the controls if they had access to a Hong Kong address. Now, even pre-2022 accounts may be deemed “illegal” and banned from unregulated foreign trades.

Stricter capital controls will likely increase demand in China for capital flight even more, as investors worry that the few exit options left to them will eventually close as well.

This could increase the use of remaining avenues for wealth transfers out of China. Traders may attempt to change the identities on the brokerages to legalize and manage the risk of their Hong Kong accounts, or move their assets through a custodian transfer (without the need to sell stocks) to brokers at Bank of China’s Hong Kong branch or HSBC Holdings PLC, which may have more permissive controls on foreign trades.

Others may seek to move their assets to brokers in the United States or Singapore, including through the use of cryptocurrencies.

Bitcoin rose for at least two days after the announced crackdown.

China has banned much crypto trading and mining since 2021, but two years later, Hong Kong attempted to become an Asian crypto-trading hub through permissive legislation and regulations. The latest crackdown will not help this goal. Neither will it ease downward pressures on China’s economy.

Prior communist crackdowns against banks, online education companies, and property developers have hurt China’s economy, and this will likely be more of the same.