CCP Crackdown on Brokerages Hits Hong Kong Finance and Property Sectors

The image depicts the exterior of the Hong Kong Stock Exchange. (Guo Weili / Dajiyuan)

[People News] The CCP has recently tightened regulations on cross-border investments and increased its efforts against stock trading platforms operated by foreign brokerages. This move threatens Hong Kong's position as the world's largest cross-border wealth centre. Chinese billionaire Yuan Gongyi has stated that the CCP's actions are targeting the assets of mainland Chinese in Hong Kong. In response, many mainland investors have urgently moved their funds, with an estimated $2 trillion transferred out of Hong Kong within the first week.

The Dajiyuan reports that for many years, attracting funds from mainland Chinese investors to Hong Kong and other international markets has been a crucial source of income for Hong Kong's banks, insurance companies, wealth management institutions, and the real estate industry. The Boston Consulting Group forecasts that due to a significant influx of mainland capital and active IPO activities, Hong Kong's cross-border wealth is expected to grow by 10.7% by 2025, reaching $29 trillion, surpassing Switzerland.

CCP's Crackdown on Brokerages

The latest analysis from Nikkei Asia News indicates that while the CCP's crackdown does not directly target banks and insurance companies, these institutions have begun to proactively tighten account opening restrictions. They are now requiring clients to sign declarations confirming that their funds do not originate from the mainland. Additionally, Hong Kong's financial regulatory authorities have warned of significant loopholes in the due diligence processes of brokerages and banks when opening accounts.

According to a report from "Longzhou Economic News" (Gavekal Draganomics) on June 11, the Chinese Communist Party's crackdown on brokerages may be just the beginning, and it also serves as a warning to banks, insurance companies, and the extensive gray market in Hong Kong that provides services to the mainland.

Market concerns about the potential impact of the CCP's new regulations on new business from mainland Chinese tourists to Hong Kong (which constitutes over half of Hong Kong's new business) have led to a decline in the stock price of AIA Group, based in Hong Kong, which has dropped more than 7.8% since early June. Similarly, the stock prices of HSBC and Standard Chartered Bank have also fallen, although they managed to recover some of their losses last week.

The article highlights that China's low bank interest rates and limited investment options are driving an increasing demand for insurance from mainland tourists in Hong Kong. Data from the Hong Kong Insurance Authority indicates that the insurance industry in Hong Kong is projected to grow by 29.7% to HKD 827 billion (USD 105.6 billion) by 2025, reaching a historic high. Premiums for personal life and health insurance have surged by 50% to HKD 312.1 billion. Notably, the CCP has not yet implemented any regulations that restrict mainland residents from purchasing insurance policies in Hong Kong, provided they are physically present in Hong Kong when signing the policy documents.

Earlier this month, AXA, a French insurance company, announced the launch of a new private client platform in Asia, aimed at wealthy individuals, with Hong Kong serving as its primary strategic base. AXA noted that since the assets of wealthy clients have achieved global diversification, it is anticipated that the CCP's new cross-border investment regulations will not have an immediate effect.

Harry Yu, a senior partner at Fung, Yu & Co., a Hong Kong accounting firm, and an advisor to ultra-high-net-worth investors, has noted that many of his clients are confused by the new regulations, uncertain whether they indicate that the Chinese Communist Party will enforce stricter scrutiny on individual overseas investments.

Similar to insurance companies, Hong Kong's banking sector has long viewed the emerging wealthy class in mainland China and their increasing demand for wealth management services with optimism. For years, mainland residents have been able to legally open bank accounts in Hong Kong, either in person or remotely. The personal transfer limit for Chinese residents is set at $50,000 per person, and many individuals frequently combine limits using multiple identification cards from friends and family to enhance their overseas remittance capacity.

According to the Gaveka report, the Hong Kong banking system serves as the starting point for most Chinese residents' offshore transactions, and establishing a Hong Kong offshore investment account is only possible by first opening a Hong Kong bank account.

In 2021, the financial regulatory authorities of the Chinese Communist Party approved a cross-border investment plan for wealth management institutions, which set the individual cross-border investment limit at 3 million yuan (approximately $444,000). This initiative aims to create a closed-loop system to prevent capital outflow. Furthermore, the plan includes several other restrictions, such as limiting participation to residents of the Guangdong-Hong Kong-Macao Greater Bay Area, which constitutes about 6% of the national population. The total inflow limit for funds into Hong Kong is capped at 150 billion yuan, and once this limit is reached, previous investments must be sold or redeemed before new investments can be initiated.

Hong Kong's real estate market may be impacted.

Concerns have also extended into the real estate sector. After years of stagnation, the Hong Kong real estate market has started to recover in recent years, driven by demand from mainland buyers. Data analyzed by Midland Realty indicates that in the first quarter of this year, mainland buyers purchased properties in Hong Kong worth a total of HKD 42.7 billion, marking a historic high and a 52.6% increase compared to the same period last year.

In a recent report, Carlos Casanova, a senior economist at Hong Kong United Private Bank, noted that buying property in Hong Kong has always been the most direct way for mainland residents to transfer their wealth abroad. With no capital controls in place, Hong Kong students can apply to mainland universities without having to take the highly competitive college entrance examination, which attracts many families to invest in property in Hong Kong. Additionally, the rebound in the Hong Kong real estate market has drawn interest from mainland buyers.

To encourage mainland individuals to invest in properties in Hong Kong, the government exempted stamp duty for first-time homebuyers under the 'Top Talent Pass Scheme' at the end of 2022. According to government data, by the end of last year, over 120,000 applicants (the majority of whom are mainland residents) had received visas. Last year, the Hong Kong government also reduced the investment threshold for the investment visa program from HKD 50 million to HKD 30 million, allowing property purchases (up to HKD 10 million) to count towards the total investment amount.

The foundation of Hong Kong as a wealth center is becoming unstable.

With the free flow of capital and an exchange rate system pegged to the US dollar, Hong Kong is increasingly recognized as a vital channel for mainland capital to access international markets and as an offshore wealth center for mainland individuals. However, the extent to which this can develop now hinges on the stance of the Chinese Communist Party.

Earlier this month, the Chinese Communist Party (CCP) introduced a personal overseas investment framework aimed at enhancing the scrutiny of strategic technologies. Since last year, there has been a significant increase in the number of Chinese companies listed on the Hong Kong Stock Exchange, leading the CCP to tighten regulations on corporate structures. They have mandated that both state-owned and private enterprises in mainland China adjust their red-chip companies listed in Hong Kong and have imposed restrictions on such structures.

The three brokerage firms most affected by this latest crackdown—Futu Securities, Tiger Brokers, and Changqiao Securities—have reported that existing mainland Chinese clients can no longer transfer funds, open new positions, or increase their current holdings.

The CCP's Securities Regulatory Commission has announced plans to eliminate the illegal operations of these three brokerages in mainland China within two years. Analysts estimate that this crackdown impacts assets in Hong Kong valued between HKD 200 billion and 250 billion.

The CCP aims to seize their assets.

In light of these developments, Hong Kong billionaire Yuan Gongyi remarked on May 29 during an episode of the YouTube channel 'Chasing the Roots' that Hong Kong banks have stopped accepting new account applications from mainland individuals. Many residents of Hong Kong depend on finance and banking for their livelihoods, previously relying primarily on investments from Americans, but now the main source of investment comes from mainland individuals. However, the new regulations imposed by the CCP have prompted many mainland investors to urgently withdraw their funds, with an estimated USD 2 trillion moved out of Hong Kong within the first week. The CCP's objective is to seize the funds held by these mainland investors, including their deposits in Hong Kong banks, investments in the stock market, and their real estate. The Communist Party seeks to take the assets of mainland investors, effectively confiscating their property, which is the essence of communism.

Yuan Gongyi stated that the current economic situation in Hong Kong is quite dire. Many long-standing restaurants and companies have gone bankrupt, and there is a noticeable decline in movie attendance. Property prices are dropping, and sales are stagnant. Currently, residents of Hong Kong are relying on their past savings to make ends meet. The economic situation in China is also beyond repair, while high-ranking officials continue to vie for power and profit, completely neglecting the economy.
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