China has recently solidified its control over capital markets by imposing heavy penalties on offshore brokers like Futu Holdings and Up Fintech Holding. On May 22, shares of both companies plummeted by 30% to over 40% following an announcement from the China Securities Regulatory Commission that targeted brokers operating without proper licenses in mainland China.
The immediate impact on these companies was severe, with Longbridge Securities, another affected offshore broker, experiencing a similar collapse in share value. The proposed fines for Futu Holdings amount to approximately RMB 1.85 billion, or about $271 million, while Up Fintech faces RMB 308.1 million in fines alongside the confiscation of RMB 103.1 million categorized as illegal earnings.
Both companies are accused of soliciting clients in mainland China to invest in foreign securities without the required domestic licenses. Affected clients are now subject to a two-year liquidation-only phase, meaning they can only sell existing holdings but cannot establish new accounts or make new investments. This crackdown could potentially impact between HK$200 billion to HK$250 billion in assets distributed among various offshore platforms.
What prompted this severe crackdown from Chinese regulators? The answer lies in the consistent warnings issued since late 2022 regarding unauthorized cross-border trading activities that bypass existing capital controls. China has stringent regulations on capital flow, and by enabling mainland investors to access foreign markets, these offshore brokers essentially circumvented those regulations.
For investors holding shares in Futu or Up Fintech, the situation has dramatically changed. A single-day drop of 30-40% is a significant market event that can influence stock performance for months or even years. This is not an issue that can be resolved by a future earnings report. As both Futu and Up Fintech have depended significantly on mainland clients for revenue, the enforcement actions and the ensuing freeze on client acquisition present serious challenges ahead.
While Futu operates in markets such as Hong Kong and Singapore, and Up Fintech has a presence in multiple regions, the imposed two-year liquidation period indicates that regulators are planning for a systematic reduction of these offshore operations rather than a one-off penalty. This timeline poses a risk of continued selling pressure from mainland clients, which could have long-term effects on the assets these platforms manage.