U.S. stocks have made 10 times more gains in the past decade than China’s domestic stocks. In preventing further capital outflow, Beijing banned new investors in mainland China from speculating in foreign exchange markets. Experts suggest the regime seeks more control over how its residents invest their money.
According to the monthly market operation report the Chinese central bank released on Feb. 23, the Shanghai Composite Index closed at 3,255.7 points at the end of January, a 5.4 percent increase month-on-month, while the Shenzhen Component Index closed at 12,001.3 points, an 8.9 percent increase month-on-month.
US Stocks Made 10X More Gain Than Chinese Stocks in Over a Decade
On the other hand, the CSI 300 index, launched in April 2005, is a capitalization-weighted index based on the top 300 stocks traded on SSE and SZSE.The rise and fall of the indices describe the trends of the respective stock markets. While SSE and SZSE Indices reflect the conditions of the specific markets, the CSI 300 Index comprehensively reflects the overall trend of China’s A-share market.
China Bans Cross-Border Brokers to Prevent Capital Outflow
China has targeted cross-border online brokerage firms in a regulatory storm, and now it is making it impossible for onshore investors to open new accounts to speculate in foreign exchange markets.The China Securities Regulatory Commission (CSRS) began to rectify the cross-border securities business of Futu Holdings and UP Fintech Holding (Tiger Securities) on Dec. 30, 2022.
The ministry claimed that the two companies conducted cross-border securities business for domestic investors without approval, which constituted “illegal” business operations according to the country’s relevant laws and regulations.
On Feb. 15, the CSRS’s spokesperson told reporters that Futu Holdings and Tiger Securities were ordered not to take on new onshore investors or open new accounts for them. Meanwhile, existing onshore clients can still trade via the brokerages, but additional fund transfers, via non-compliant channels, to their accounts will be banned.
“The Chinese Communist Party (CCP) wants to control the flow of the funds of ordinary people in China. It has cut off the investment channels of ordinary people, hoping to drive their money back to the Chinese economy through preferred channels, such as the recently launched real estate private equity investment fund,” Fang Qi, a UK-based senior Chinese financial specialist, told The Epoch Times on Feb. 24.
He said dual-currency credit cards have also been suspended in addition to the restrictions placed on Futu Holdings and Tiger Securities. Now, this type of credit card can only be settled in Chinese yuan at home and abroad.
“The CCP cannot stop the outflow of capital because all foreign-funded enterprises are leaving, such as Apple, Sony, and Toyota, have started moving their industrial supply chains out of the country while temporarily retaining the production capacity in China. They will definitely pull out their funds when they leave,” Fang said.
“The CCP is more worried that this trend will spread to Taiwanese, Korean, German, or other foreign-based companies operating in mainland China. However, this kind of outflow is inevitable due to geopolitical reasons.”
Overseas investment has been withdrawing from the Chinese market on a large scale since 2022.
According to a research report released in December 2022 by Xiong Yi, Chief Economist at Deutsche Bank China, in the first half of 2022, capital outflows from China’s bond and stock markets had reached $100 billion per month and fell to around $50 billion a month in the second half of the year.
Analysis: ‘There is Rigid Demand for Cross-Border Stock Trading in China’
Chinese authorities stipulated that residents in mainland China can only invest indirectly in overseas capital markets through Qualified Domestic Institutional Investors (QDII) or directly buy and sell stocks via cross-boundary investment channels, such as the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect with certain thresholds.However, Futu Holdings and Tiger Securities have a much lower investment threshold than the stock connects and QDII, with much lower commissions and fewer restrictions.
According to a report in August 2013 by the state-owned China Economic Weekly, at the time, over 300,000 people in China had “bypassed” the state-approved channels to invest in U.S. stocks. Investors in mainland China had reportedly opened accounts directly with foreign brokers via the internet. Meanwhile, the securities accounts provided by brokerages in Hong Kong allow clients to invest in securities markets in other regions on top of the United States and Hong Kong.
The report said the sentiment to invest in U.S. stocks is high, showing a greater potential than China’s A-share. And even China’s Securities Regulatory Commission had a different attitude at the time. It was “planning to launch a qualified domestic individual investor system as soon as possible.”
But now, the attitude of the Chinese regulator has reversed.
Yang Bo, the founder of Qingbo Tech, a Shanghai-based information technology company, published an article on Fortune China on Feb. 15 titled “The supervision of cross-border stock trading has been strengthened. What is the understanding of the overseas stock investment needs of Chinese people?”
The article said that although the authorities suspended the opening of new brokerage accounts, the real difficulty lies in the existing clients, and there is a reason why they haven’t been suspended.
“If the trading authority of these brokerage accounts is closed across the board, considering these accounts are in overseas markets, if overseas exchanges do not cooperate [with the new Chinese regulatory rules], I am afraid they will not be able to land,” Yang wrote. He is saying that the CCP will not be able to implement them
“,,, if the [foreign] exchanges are willing to cooperate, considering that many of these accounts are investment stocks for the company, under the wave of selling, it is unpredictable whether the Hang Seng Tech Index or the Chinese concept stocks that have just come out of the ICU, will experience another sharp drop.”
Hang Seng Tech Index represents the 30 largest technology companies listed in Hong Kong.
Yang added that some residents in mainland China need cross-border financial management, such as those who work for technology companies listed on Hong Kong or U.S. stock exchanges. Most of these employees have stock options or even shares of their companies.
“Chinese people’s overseas financial management needs are actual needs, including but not limited to cross-border investments such as stocks and real estate. However, under the existing regulatory logic, it is also a gray area. From all kinds of gray or even underground channels to legal channels, I am afraid it is probably a topic that urgently needs in-depth consideration.”
