Hong Kong brokerages are starting to suspend accounts by mainland Chinese customers to comply with a ban issued late last year designed to halt an outflow of cash that runs afoul of the country’s strict capital controls.

Hong Kong-based Bright Smart Securities is suspending accounts held by mainland Chinese clients until further regulatory guidance is given, according to notice sent to clients that was seen by Bloomberg News.

The Hong Kong unit of Chinese brokerage Guotai Junan Securities issued a similar circular, according to a report by thee Securities Times, which later became unavailable online. Spokespeople at Guotai Junan and Bright Smart didn’t immediately respond to requests for a comment.

China in December pledged to step up oversight of illegal cross-border securities activities. It told Futu Holdings Ltd. and Up Fintech Holding Ltd., better known as Tiger Brokers, to halt “illegal” activities and stop taking on new onshore investors, wiping out billions in market value and causing Futu to delay its Hong Kong listing.

The directive also dealt a blow to Hong Kong-based brokers as they had to rethink a much-anticipated marketing push to mainland Chinese clients after almost three-year Covid travel restriction between the two markets.

Cross-border brokerages have been operating in a gray area in allowing millions of Chinese investors to sidestep capital controls.

The Communist Party-ruled country bars individuals from using the $50,000 annual foreign currency quota for purchases of securities and insurance offshore, but many in mainland China have ignored the law and skirted the rules by opening up accounts abroad.

Efforts will be made to gradually rectify the illegal activities, according to regulations issued by the China Securities Regulatory Commission that will take effect on Feb. 28. The general approach is to effectively curb such practices and resolve the existing business in an orderly manner, according to the rules.

Bright Smart said it will only sell shares for the clients starting Thursday and asked customers to withdraw all funds from the account by Feb. 23, according to the notice seen by Bloomberg News.

(Bloomberg)

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Hong Kong brokers suspend accounts of China users after crackdown – Bloomberg News