Mainland Chinese savers flock to Hong Kong as regulators tighten capital controls

Some savers from mainland China are travelling to Hong Kong and scrambling to explore options to retain their investments in the financial hub, after Beijing's unexpected crackdown last month on "illegal" cross-border securities trading.

Chinese regulators in late May announced a major crackdown on cross-border investments and punished three online brokers for "illegally" helping Chinese investors buy shares in foreign markets, including in Hong Kong.

The latest crackdown has clouded the prospects of mainland investors' pursuit of investments in Hong Kong, their most favoured offshore market due to the variety of products offered and the ease of access to foreign currencies.

At stake are an estimated US$54 billion (S$69.7 billion) in financial assets, according to brokerage Kaiyuan Securities, which includes US and Hong Kong stocks, held by mainland individuals drawn to offshore markets by surging tech shares and lucrative returns.

Some of the mainland visitors to Hong Kong are scrambling to move assets out of the sanctioned online brokers to smaller Hong Kong-focussed peers and rushing to meet tightened customer diligence rules at city-based banks.

One of them, a retired Chinese public servant, attempted to set up her new trading account by using Hong Kong broker uSmart's mobile app shortly after exiting from a high-speed train at Hong Kong's Kowloon station last week.

The person said that she decided to make the trip after her friend arrived in the city earlier and opened a new trading account with a local broker to move assets from Futu, one of the brokerages fined by regulators in late May.

The three sanctioned online brokerages — Futu, Tiger and Longbridge — were penalised by regulators for soliciting business in China without an ‌onshore licence. 

Brokers in the mainland are not allowed to provide offshore trading services.

Brokers with licenses in Hong Kong, however, can serve mainland visitors.

"I hope to set up everything in one-go — bank and broker accounts," said the former public servant, declining to be identified due to the sensitivity of the matter.

Around three dozen mainland visitors filled up the branches of Hong Kong brokers uSmart and Chief Securities to open accounts on Wednesday in West Kowloon, with some travelling from as far as the southern Chinese town of Gui Yang.

"There are many Futu refugees these days coming here," said a broker employee who helped more than a few dozen visitors to open accounts on average daily since the crackdown, referring to impacted mainland investors.

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'Why this sudden move?'

Mainland retail investors are officially allowed to invest in Hong Kong markets only via the tightly regulated southbound Stock Connect channel and the quota-based Qualified Domestic Institutional Investor (QDII) funds programme.

In response to Reuters' request for comment, the China Securities Regulatory Commission (CSRC) said that the crackdown targets brokers' illegal operations in mainland China and won't affect their overseas business activities.

Chinese investors' accounts won't be forcibly closed and there will not be mandatory liquidation of assets due to the rectification campaign, it added.

The three penalised brokers have said that they would halt services for opening or adding to positions and transferring funds into accounts for mainland Chinese investors from June 12.

A Shanghai-based investor surnamed Xie, who has been using Futu and Longbridge to trade US and Hong Kong stocks for several years, liquidated his entire holdings with those two brokers over the last two weeks.

Xie is now looking for alternative ways such as establishing an offshore company to make overseas investments. 

"The yuan is appreciating, and there's not much pressure on forex - why this sudden move?" he wondered.

Regulatory divide

A Guangdong-based retail investor surnamed Wang said that she rushed to Hong Kong soon after regulatory move to open a trading account with a city-based brokerage and cleared out her account with Tiger.

"You'll never know when they (online brokers) decide to shut down completely," said Wang, who managed to set up the new Hong Kong broker account by using her mainland ID. 

Since then, she has received more than a dozen requests for help to move assets.

Hong Kong's securities regulator and banking regulator told Reuters they will continue to allow local brokers and banks to serve Chinese clients holding mainland Chinese identity documents, but with tightened checks.

Brokerage firms "are ultimately responsible for ensuring appropriate standards of conduct and robust internal control systems" for account opening, the Securities and Futures Commission said on Friday.

Meanwhile, some mom-and-pop savers from the mainland also flocked to Hong Kong branches of banks with operations in China, including HSBC, to meet tightened checks on customer backgrounds amid Beijing's capital outflow control measures.

HSBC, for example, has asked mainland ​clients seeking to open investment accounts to sign a ⁠declaration confirming their funds come from overseas rather than China, Reuters reported, citing sources, last month.

Part of the intention of the latest crackdown is to convince Chinese people to make more investments in the country itself, Ting Lu, chief China economist at Nomura, told Reuters.

"(They're) just trying to channel the savings to China's high-tech sectors, especially for those sectors, which can narrow the tech gap between China and the US."

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