CITIC Securities: Broker's cross-border trading restrictions may affect assets worth HKD 250 billion

Bloomberg, citing a report from China CITIC Securities, said that Chinese regulatory authorities initiated a new round of rectification actions against illegal cross-border stock transactions last Friday, which may impact approximately 200 billion to 250 billion Hong Kong dollars in assets in Hong Kong.

The analyst team led by Tian Liang at China CITIC Securities pointed out that the affected assets are mainly concentrated in internet brokerage firms that provide overseas trading services to mainland investors. Among them, Futu Holdings' corresponding asset scale is estimated at around 150 billion to 180 billion Hong Kong dollars, while Tiger Brokers is about 45 billion to 50 billion Hong Kong dollars. Including other brokers incorporated into the rectification, the overall scale could reach 200 billion to 250 billion Hong Kong dollars.

The core of this regulatory action is to strictly limit the participation of mainland residents in overseas market transactions through unapproved channels. The regulatory department has determined that organizations such as Futu, Tiger Brokers, and Changjet Securities are operating illegally in the mainland and will penalize them and confiscate the "illegal income" of domestic and foreign entities. According to current arrangements, a two-year transition period will be set for the relevant businesses. Existing investors can still log in and use their accounts, but their trading authority is significantly reduced: they are only allowed to sell assets and withdraw funds, and are prohibited from making new purchases and depositing funds.

Market Impact Controllable

Morgan Stanley believes that this arrangement is more about eliminating long-standing regulatory uncertainties, with direct financial impacts still within the manageable range. The bank stated that it does not anticipate all mainland clients' accounts in Hong Kong to be closed within two years; the focus of the restrictions is that related transactions, fund deposits, and withdrawals cannot occur within the territory.

China CITIC Securities also emphasized that the 250 billion Hong Kong dollars of affected assets should not be simplistically viewed as potential selling pressure on the Hong Kong stock market. These assets are distributed across different products, and **even involving stock sales, they are more likely to be gradually and orderly completed during the two-year transition period, thus the market impact is expected to be controllable.**

China CITIC Securities further estimates that the demand for overseas asset allocation is likely to shift towards domestic compliant wealth management platforms. Securities firms and wealth management institutions with a strong customer base and cross-border product capabilities are expected to meet this transferred demand.

The market has already preemptively reflected this policy signal. The CSI 300 index rose 1.1% at one point on Monday, with Bloomberg stating that the trading logic lies in the fact that stricter capital controls may encourage the return of funds to the domestic stock market. Overseas Chinese concept assets faced pressure — the NASDAQ Golden Dragon China Index fell 2.2% on Friday, and Futu Holdings' stock price plummeted by 28% (following the company's disclosure of a proposed regulatory fine of about $271 million). The Hong Kong market was closed on Monday due to a holiday, and the related impact has not yet been reflected in Hong Kong stocks trading.