China’s ban on cross-border brokers dampens market sentiment
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China imposed an order targeting cross-border brokerage platforms, but the move will result in Futu Holdings Ltd losing its clientele base. The action will also dampen the market sentiment that was already affected by the country’s strict COVID restrictions.
China’s ban on cross-border brokers
China ordered Futu and Up Fintech Holding Ltd to rectify their “illegal” business dealings or stop opening accounts for new overseas investors. The order noted that the existing onshore investors could continue trading on the platform. However, the additional transfer of funds to these accounts using illegal channels would be banned.
A report by Bloomberg cited an analyst at Daiwa Capital Markets Hong Kong Ltd, Leon Qi, who said that from the company’s perspective, the orders given by the regulator “defined cross-border brokerage as illegal.” The order also came after Futu halted its Hong Kong listing shortly before it was scheduled to debut.
Nevertheless, a crackdown on cross-border brokerage activity was expected. The move will have far-reaching adverse effects, such as reducing the existing clientele base for Futu in Mainland China by 20% annually from 2023. The company’s revenues are also expected to drop by a “high single-digit” amount in 2023.
On Friday, Futu shares dropped by 31% in the US market, while the shares of Up Fintech dropped by 28.5%. As the regulator banned offshore investors, only around 10% of the new users at FUTU are from mainland China. This shows that the effects of this order will be dire. Daiwa has given Futu a Buy rating and maintained the price target at $64. The firm is also urging investors to pay more attention to the fundamentals.
According to Huatai Securities Co, the Futu share price has factored in the pessimism surrounding the regulatory changes announced. On the other hand, Citic Securities Co expects that Futu will perform better within the regulatory guidelines. The two companies have a buy rating for Futu stock.
Focus on cross-border operations
Futu and tiger Brokers previously allowed investors in mainland China to trade stocks in foreign markets such as Hong Kong and New York. However, a senior official at the country’s central bank questioned the legitimacy of online trading platforms saying that their services were “illegal.”
The criticism from the country’s central bank led to companies turning their attention away from the domestic market. Tiger Brokers also started downsizing, and Futu turned to foreign markets to diversify its growth.
Following the recent changes, the two companies have said they will work with regulators and take measures to review their cross-border activities in mainland China. The CSRC will monitor the changes made by the two companies before taking the necessary actions.
