(Bloomberg) -- China has asked two cross-border brokerages to rectify “illegal” business activities, sending depositary receipts of Tencent Holdings Ltd.-backed Futu Holdings Ltd. tumbling.
The China Securities Regulatory Commission said in a statement Friday evening it would ask Futu and Up Fintech Holding Ltd. to stop taking new onshore investors as customers or opening new accounts for them. Existing onshore clients can still trade via the brokerages but additional fund transfers via non-compliant channels to their accounts will be banned, it added.
The two firms had over the years conducted cross-border securities trading business without approval from the CSRC, the regulator said. “Their act has constituted illegal operation of securities business according to the Securities Law and related regulations.”
Futu’s ADR’s fell as much as 30% in premarket trading in New York, while Up Fintech plunged as much as 35%.
Futu and Up Fintech, which is known as Tiger Brokers, have been operating in a gray area for their mainland China businesses, allowing millions of local investors to evade capital controls to trade shares in markets such as Hong Kong and New York. A senior central bank official has questioned the legitimacy of online trading firms, calling their services “illegal” at least twice since 2021.
The criticism had prompted the companies to shift their focus away from the domestic market even before Friday’s regulatory order. Tiger Brokers was resorting to job cuts and Futu was eying overseas markets to diversify its growth.
Futu just abruptly postponed its Hong Kong listing less than a day before its scheduled debut on Friday, saying it was “clarifying certain matters” without elaborating.
The market regulator summoned executives from both firms in November last year, ordering them to rectify cross-border stock trading business targeting domestic investors, it said in the Friday statement. The CSRC will dispatch a task force to supervise rectification work at both firms and take further measures as appropriate.
The scrutiny just came after China further tightened its grip over its battered online education industry, adding to more signs that Beijing is not yet letting up on its yearlong crackdown over the private sector.
(Updates with more details and context.)
©2022 Bloomberg L.P.
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