China warns unlicensed online brokerages they are breaking the law

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The headquarters of the People’s Bank of China (PBOC), the central bank, is pictured in Beijing, China on September 28, 2018. REUTERS / Jason Lee

SHANGHAI, Oct.28 (Reuters) – A Chinese central banker has warned that online brokerage firms unlicensed in China are acting illegally if they serve Chinese clients via the internet, by sending New York-listed shares of Futu Holdings Ltd ( FUTU.O) and UP Fintech Hold significantly lower.

“Cross-border online brokers are driving in China without a driver’s license. They are carrying out illegal financial activities,” Sun Tianqi, head of the financial stability department of the People’s Bank of China (PBOC), said in a speech, according to a report. transcript published Wednesday.

Futu and UP Fintech shares fell more than 20% in pre-market trading on Thursday on Sun’s remarks, the first official comments following recent media reports pointing to regulatory risks facing online brokers.

Shares of both companies had already fallen since Oct. 14, when the official People’s Daily said in an analysis on its website that Futu and UP Fintech face regulatory risks as China’s new data privacy law personal data comes into effect on November 1.

Investors fear the sector may be the next in Beijing’s regulatory sights, after China launched a wave of crackdowns targeting sectors ranging from tech to cryptocurrency and real estate.

Investors need to see if the Chinese government will prevent domestic individuals from opening an account at an offshore bank, and if they can use that account to open a trading account with offshore brokers like Futu, Jefferies said in a note.

SUFFICIENT CAPITAL

Jefferies added that many Chinese brokerage houses have established their offshore subsidiaries to provide trading services in Hong Kong or the United States to domestic individuals, and that foreign brokers, including Interactive Brokers Group Inc (IBKR.O), also accept mainland Chinese customers, so “we have to wait for more guidance from regulators.”

Futu Chairman and CEO Hua Li said in a statement Thursday that the company has business licenses in Hong Kong, has a good balance sheet, has sufficient capital and “there is no bankruptcy problems “.

The PBOC official’s speech threatens to further undermine foreign investor confidence in Chinese tech companies, said an institutional investor in UP Fintech, who declined to give his name.

Speaking at the Bund summit in Shanghai this weekend, PBOC’s Sun said that some online brokerage firms, with only overseas licenses, primarily serve investors from mainland China, allowing them to trade deals. US and Hong Kong stocks.

Without identifying the companies, Sun said that 80% of the accounts of a brokerage registered in Cayman Islands were opened by clients from the mainland, while the ratio is 55% for another brokerage registered in Hong Kong. .

“Financial licensing has national borders,” Sun said. “Overseas institutions holding only overseas licenses operating in Mainland China constitute illegal financial activity.”

The transcript of Sun’s speech was posted on the Forum Finance 40 website, which hosted the summit.

Futu, which has licenses in Hong Kong, Singapore and the United States, said in its 2020 annual report that it primarily serves the emerging affluent Chinese population and that a large number of its customers are mainland Chinese citizens. .

Futu said he did not expect to engage in securities brokerage business in China by redirecting users and clients to opening accounts and transactions outside of China, but said he there were regulatory risks.

Reporting by Samuel Shen and Andrew Galbraith; Editing by Robert Birsel and David Holmes

Our Standards: Thomson Reuters Trust Principles.


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