China’s trading crackdown seen boosting Hong Kong as official capital hub

China’s crackdown on cross-border securities trading could strengthen – rather than diminish – Hong Kong’s financial role, according to economists, as Beijing steers more capital through official channels and reinforces the city’s status as an offshore yuan hub.

“I would argue that these moves make the importance of Hong Kong even bigger,” Diana Choyleva, founder and chief economist at Enodo Economics, said on Tuesday at the World Economic Forum’s annual “Summer Davos” meeting.

Referring to Beijing’s recent crackdown, Choyleva said authorities were seeking to curb illegal capital outflows while pursuing “an increase in opening up the flow of capital, through Hong Kong via the connect schemes” – cross-border investment channels linking the financial markets of mainland China and Hong Kong.

Her comments followed moves by the China Securities Regulatory Commission (CSRC) last month to penalise three brokerages – Futu Securities, Tiger Brokers and Long Bridge – for illegally granting domestic investors access to overseas securities trading. The action has fuelled concerns regarding capital controls and the future of Hong Kong’s role as a wealth hub.

Speaking during a panel discussion on the opening day of the three-day gathering, Choyleva said that the recent move was part of an ongoing multi-year effort to tighten illegal capital outflows from China.

Authorities are “really making the point clear here, but simultaneously widening the connect schemes, allowing more capital to flow through Hong Kong”, she said.

Choyleva noted that the city’s role was shifting from a conduit for foreign investment into mainland China to a hub where China’s domestic wealth is “intermediated on China’s own terms” with the rest of the world.

“The connect schemes are an extension of China’s capital controls,” she added.

Hong Kong has been leading the offshore yuan centre for China. I think that trend will continue

Zhu Ning, Shanghai Jiao Tong University

Zhu Ning, deputy dean of the Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University, said he did not think the recent crackdown would “have too much to do with the future of Hong Kong remaining or continuing as an offshore yuan international centre”.

“Hong Kong has been leading the offshore yuan centre for China. I think that the trend will continue for a very long period of time,” he added.

The CSRC’s move last month was among Beijing’s latest efforts to clean up the nation’s capital market, where domestic investors are banned from buying overseas securities except through a few official channels, such as the Stock Connect scheme with Hong Kong.

Hong Kong’s regulators quickly responded by launching their own push to tighten controls, with the Securities and Futures Commission requiring licensed brokerages to conduct internal checks to ensure no falsified documents or materials were used when opening accounts.

The Hong Kong Monetary Authority, meanwhile, instructed banks to require mainland customers opening investment accounts to declare that their funds originated outside mainland China.

A report by Citic Securities last month estimated that the recent crackdown had an impact on as much as HK$250 billion worth of assets in the city. Specifically, it could affect between HK$150 billion and HK$180 billion worth of assets owned by mainland Chinese investors with Hong Kong stock accounts at Futu, according to the note.

However, a note from Shanghai-based brokerage Shenwan Hongyuan Group estimated that the clampdown could involve only HK$86 billion worth of Hong Kong stocks, contending that assets held by mainland Chinese investors accounted for only 20 per cent of the HK$430 billion in total client assets held by the three targeted brokerages.

The sweeping campaign is not the first of this kind. In December 2022, the watchdog ordered overseas brokerages to stop developing new mainland Chinese clients and opening new stock accounts.