The Implementation Plan for the Comprehensive Rectification of Illegal Cross-border Securities, Futures and Fund Business Activities (the “Implementation Plan”), recently joint-issued by eight Chinese regulatory bodies including the China Securities Regulatory Commission (CSRC), outlines a strategy to crack down across the entire value chain on cross-border securities investments conducted by unlicensed institutions, while mandating a total ban on the illegal cross-border business operations of offshore entities. Concurrently, the CSRC issued regulatory penalties against three cross-border digital brokerages primarily operating out of Hong Kong, namely Futu Securities International, Tiger Brokers, Longbridge Securities. It is set to confiscate all illegal gains from their relevant onshore and offshore entities alongside severe statutory penalties, with total fines and forfeitures exceeding RMB 2.2 billion.
Simultaneously, regulatory authorities in Hong Kong and the United States have taken coordinated action. On May 22, the Hong Kong Securities and Futures Commission (SFC) issued a circular on licensed corporations, requiring those serving offshore investors directly or through intermediaries to strictly comply with all relevant laws and regulatory requirements of Hong Kong and the applicable jurisdictions. It explicitly stated that they must not engage in or facilitate any illegal activities. The circular specifically directed licensed corporations to take note of the joint rectification plan issued by the CSRC and other mainland authorities on May 22, 2026. This underlines a distinct alignment and mutual coordination between Hong Kong and mainland authorities regarding cross-border financial regulation. In the U.S., President Donald Trump signed an executive order on May 19 that bypassed Congress to directly mandate that banks more scrutinously verify customer citizenship. The order instructs banking regulators and government agencies to closely monitor whether undocumented individuals are opening accounts, securing loans, or obtaining credit cards. This marks a new measure by his administration to crack down on undocumented residency in the U.S. This directive similarly tightens the reins on cross-border financial investments operating within regulatory "gray areas", particularly securities investments conducted via the internet. The successive moves by both China and the U.S. to tighten oversight and scrutiny of cross-border financial activities suggest a shared, implicit consensus on strengthening regulatory boundaries.
Notably, many have interpreted the CSRC's penalties on cross-border digital brokerages as a measure to restrict capital outflow. In the view of researchers at ANBOUND, while this factor certainly exists, viewing it solely through the lens of capital flows may be superficial, as the underlying policies involve much deeper considerations.
Even though China's foreign trade has improved, it has not brought funds back into the country. Instead, capital is moving out. Because U.S. interest rates are so much higher than China's, many prefer keeping their cash in U.S. dollars to protect themselves from political and currency risks. Even when the Chinese yuan shows strength, companies just are not converting their foreign currency. Look at the first quarter of 2026: China’s current account surplus hit USD 184.1 billion, driven by a massive USD 247.4 billion goods trade surplus. However, official banking statistics show net foreign exchange settlements of only USD 138.7 billion. That means nearly a third of the trade revenue stayed abroad. This is in fact not a new issue. Guosheng Securities estimates that from 2022 to 2025, a massive USD 1.13 trillion in foreign exchange went un-converted. The problem has actually accelerated over time, with USD 230.8 billion in 2022, USD 159.8 billion in 2023, USD 333.3 billion in 2024, and peaking at USD 401.2 billion in 2025. With U.S.-China frictions intensifying, keeping cash overseas has simply become the preferred safety buffer for market participants.
This phenomenon reflects that within the current "dual circulation" framework, a substantial amount of capital remains in the external circulation rather than flowing back to China’s domestic circulation. As overseas stock markets, such as those in the U.S. and Hong Kong, continue to rally, they have attracted a significant influx of mainland China’s capital. Data compiled by Bloomberg Intelligence indicates that approximately USD 1 trillion in "hot money" exited China last year, marking the largest annual capital outflow since record-keeping began in 2006. According to a research report by Soochow Securities, the asset side of the non-reserve financial account recorded a net outflow exceeding USD 550 billion in the first quarter of this year. These indicators imply that although foreign trade has maintained an upward trajectory since last year and export enterprises have generated substantial trade surpluses, a considerable portion of these funds within the external circulation has not returned to the domestic circulation to support consumption or investment. Instead, a massive volume of capital is either parked overseas or funneled through various channels to remain within the external loop. This not only confines the positive impact of foreign trade on the economy to what seems to be gains on paper but also creates a severe disconnect between China’s domestic and international circulations. In this regard, severing the various illicit channels fueling capital flight should be a primary focus of macroeconomic regulatory countermeasures.
Of course, this is not a matter of completely sealing off capital outflow channels, but rather reducing illicit channels while encouraging official conduits. The objective is to regulate and control capital flight, ensuring that outbound investments remain firmly within regulatory oversight. In essence, this resembles a further push to bring pre-existing gray financial areas between the U.S. and China into the daylight, which is a tactical move within geopolitical financial sparring aimed at pulling Chinese capital back under sovereign supervision. On the U.S. side, any cooperation is likely driven by a desire to prevent Chinese capital from exerting influence on domestic American policy, thereby sustaining its established policy of "decoupling and severing supply chains" within the capital arena. This development can contribute to the bilateral capital linkages becoming more defined, transparent, and manageable, mitigating the impact of unforeseen variables on cross-border capital flows.
However, the ban on relevant cross-border online brokerages conducting business in mainland China does not penalize the affected investors. Instead, it allows for a certain transition period, enabling existing investors to manage and liquidate their assets. On the one hand, this approach prevents damage to investor interests. On the other hand, it reflects a deliberate effort to maintain stability in the Hong Kong stock market. After all, a panic-driven mass sell-off by these investors would inevitably inflict a short-term shock on Hong Kong equities. This would not only destabilize the local market but also compromise the asset valuations of numerous mainland companies listed in Hong Kong. CITIC Securities estimates that this regulatory rectification could impact up to HKD 250 billion in Hong Kong assets, with Futu accounting for approximately HKD 150 billion to HKD 180 billion. Futu has underwritten 30 IPOs in Hong Kong so far this year, outnumbering any single bank. Consequently, this measure not only dampens liquidity in the Hong Kong stock market but also poses a challenge to upcoming IPOs. Nevertheless, judging by market reactions, neither the Hang Seng Index nor the Nasdaq Golden Dragon China Index in the U.S. experienced a sustained decline, indicating that the policy has not triggered widespread panic.
China's latest regulatory action is not a sudden move but a calculated step in a broader crackdown on illegal financial businesses. The goal is to clean up long-standing gray areas in cross-border investments and prevent systemic risk. Regulators have been sounding the alarm since 2022, repeatedly warning that these cross-border securities investments were operating illegally. The authorities previously banned the relevant apps from the country’s domestic app stores to cut off new customer acquisition. Yet, despite tighter rules, existing clients kept trading. By forcing current users into a "sell-only" model over the next two years, the Chinese authorities are signaling a major escalation in the enforcement campaign. This move will permanently choke off non-compliant offshore channels and end the era of unlicensed cross-border brokerages. From here on out, all cross-border investing will be consolidated into official, regulated channels like QDII, Wealth Management Connect, and the Stock Connect programs.
One of the most notable aspects of this crackdown on cross-border online brokers is whether "long-arm jurisdiction" over offshore entities can actually be enforced. Because the measures target both the domestic and overseas entities of the three brokerages, this has to do with the effectiveness of the regulation. For now, all three brokers have stated they will comply with the regulatory mandates. Futu disclosed that by the end of Q1 2026, the proportion of its paying clients from mainland China had already dropped to 13% of its global total. Tiger Brokers initially noted that the penalized entity was its mainland branch and did not directly involve its Hong Kong entity, which operates independently under a license from the Hong Kong SFC. However, the company quickly issued a clarification, emphasizing that it will strictly follow the guidance of the CSRC and relevant authorities to rectify its operations lawfully. This situation demonstrates that under China’s look-through regulatory approach, mainland securities laws can effectively extend to offshore institutions. Compliance is enforced, on one hand, by choking off capital at its source. On the other hand, it highlights how China is successfully asserting its regulatory jurisdiction over offshore entities within the "one country, two systems" framework.
Notably, all three penalized Hong Kong-registered brokers are backed by major mainland Chinese internet giants, a connection that likely explains why these offshore entities accepted the regulatory penalties so readily. A look-through analysis reveals that Tencent holds a 20% stake in Futu, making it the largest shareholder. Furthermore, Futu’s deep ties to the broader tech ecosystem are cemented by its role in anchoring massive IPOs, having generated tens of billions in subscription volume for companies like Kuaishou (HKD 42.6 billion), Nongfu Spring (HKD 35.2 billion), and JD Health (HKD 20.7 billion). Meanwhile, Tiger Brokers has Xiaomi among its key backers, and Longbridge Securities, the latest player to emerge, operates with support from the Alibaba ecosystem. The business models of these three brokerages are remarkably similar. They leveraged the massive traffic of tech giants to funnel mainland clients into offshore financial platforms, allowing them to trade Hong Kong and U.S. equities. While this represents a modern, tech-driven evolution of traditional finance, operating outside the scope of financial supervision for so long has undoubtedly created substantial underlying risks. Seen in this light, the penalties against these cross-border brokers align perfectly with China's broader strategy to curb the "disorderly expansion of capital" and guide the platform economy toward healthier development.
While ensuring regulated and protected channels for legitimate capital to "go global" is a core mandate of financial supervision, over the long term, "channeling rather than blocking" remains the ultimate solution to the problem of "disorderly" flows. In the view of ANBOUND’s founder Kung Chan, continuing down a path dominated by restrictions and cutoffs that disrupt or entirely sever the links between China’s domestic and international circulations will only incentivize capital flight through underground financial channels. Faced with underground finance, most countries are largely powerless, and China is no exception. Kung Chan believes that the fundamental way to address disorderly capital flight is to establish a "cyclical capital chain" that integrates domestic and international capital flows. On the one hand, a healthy and efficient government bond market has the capacity to attract capital back home. On the other hand, as ANBOUND previously noted, developing and managing corporate organizational systems can encourage enterprises to generate wealth in global markets, while ensuring that investment profits flow back to purchase sovereign bonds and invest in the domestic market. Only when this "cyclical capital chain" is fully constructed can the underlying issue be truly resolved. Naturally, this is a systemic challenge rather than a mere regulatory matter.
Final analysis conclusion:
The regulatory actions and penalties imposed by Chinese securities regulatory authorities on the mainland business of cross-border online brokerages not only have the direct effect of constraining and regulating capital flight but also represent an extension of the country’s stringent supervision financial policy under the conditions of geopolitical competition. Furthermore, they reflect deeper strategic considerations to regulate and guide the healthy development of the platform economy. Ultimately, the fundamental solution to addressing the disorderly expansion of capital overseas is not a mere regulatory issue, but rather a systemic challenge requiring the construction of a cyclical capital chain.
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Dr. Wei Hongxu is a Senior Economist of China Macro-Economy Research Center at ANBOUND, an independent think tank.
