Offshore Broker Crackdown: Why Are US-Listed China Stocks Down?
6 Min. Read Time
Offshore Broker Regulatory Action Briefing
After the close in Hong Kong, the China Securities Regulatory Commission (CSRC), China’s SEC, announced that “Tiger Brokers, Futu Securities, and Changqiao Securities, both domestically and internationally, conducted securities trading marketing and promotion, processed trading orders, and generated related revenue within China without approval from the China Securities Regulatory Commission (CSRC) and without obtaining licenses for securities brokerage and securities margin trading.”
The announcement has teeth, though they need to be proven guilty as “the China Securities Regulatory Commission (CSRC) intends to confiscate all illegal gains of Tiger Brokers, Futu Securities, and Changqiao Securities, both domestically and internationally, and impose severe penalties, according to the law. Regarding the proposed administrative penalties, the parties involved have the right to make statements, defenses, and request hearings.”
The announcement is sending US-listed China stocks lower pre-market. We want to highlight the following:
1)These brokers have been operating without domestic licenses for years, which is why many investors, including us, have avoided owning their stocks.
2) Do you think the brokers’ Chinese clients were only buying US-listed China stocks? I don’t! Why would they when they can buy many of the same stocks in Hong Kong through Stock Connect? I assume they were buying US technology stocks, though I cannot say for certain.
3) The timing is terrible, as US-China relations are finally improving. The optics of a regulator’s interference in markets, whether it is justified or not, will not help sentiment. The initial reaction looks outsized, as the stocks are down several percentage points pre-market. I do not believe these brokers have significant US-listed China positions, which is why I am surprised by the downdraft in US pre-market trading.
Key News
Asian equities ended the week on a high note, as the US dollar weakened amid the potential for Middle East tensions to ease.
Hong Kong and Mainland China were led higher by growth stocks, as the Hang Seng Tech gained +2.11%, Shenzhen gained +2.23%, and the STAR Board gained +1.51%. The rebound from yesterday’s downdraft had several tailwinds as Nvidia’s financial results are lifting its Mainland China suppliers, as technology hardware and chips outperformed in both markets.
The National Development and Reform Commission (NDRC) spoke on AI policy support while reiterating that foreign investors can invest in Chinese technology companies. Mainland media noted that the US Commerce Department may ease semiconductor export controls for Asian allies, potentially allowing Chinese semiconductor companies access. Minimax gained+15.91%, and Knowledge Atlas, which is also known as Zhipu, gained +26.93%. Knowledge Atlas also announced the release of its GLM-5.1 High-Speed API.
Knowledge Atlas also rallied in advance of Hang Seng’s index rebalance and inclusion announcement after the close. Both stocks will be added, while Kingdee, which gained +2.48%, and Kingsoft, which gained +1.78% will be removed from the Hang Seng Tech Index. The Hang Seng Index will add Beigene (Beone) +0.75%, Aluminum Corp of China (Chalco) +2.45%, and J&T Express +2.13% when it rebalances at the day’s close on Friday, June 5th.
Alibaba gained +0.79%, and Tencent gained +0.55% despite Mainland investors selling $263 million and $220 million worth of stock via Southbound Stock Connect. Meituan fell -0.91, JD.com fell -1.46%, and Trip.com fell -1.97% despite the State Council meeting on “unified national market” that aims at reducing municipal and provincial trade rules. Mainland investors sold a net $828 million worth of Hong Kong-listed stocks and ETFs today.
NetEase gained +5.71%, as Hong Kong investors reacted to yesterday’s Q1 results, despite US investors sending the US ADR 2.12% yesterday. CATL gained +1.85% in Hong Kong, though it fell -0.11% in China.
Insurance, oil/gas, liquor, and healthcare underperformed today.
The State Council also announced “Implementation Opinions on Delivering Basic Public Services by Place of Permanent Residence,” which would provide migrant workers with more access to public services enjoyed by permanent residents.
The NDRC announced gas and diesel prices are going up by RMB 75 and RMB 70 per ton, which raises the cost of refueling a 50-liter tank by RMB 3.
Last Night's Performance
| Country / Index | Ticker | 1-Day Change |
|---|---|---|
| China (Hong Kong) | HSI Index | 0.9% |
| Hang Seng Tech | HSTECH Index | 2.1% |
| Hong Kong Turnover | HKTurn Index | -5.8% |
| Hong Kong Short Sale Turnover | HKSST Index | -19.5% |
| Short Turnover as a % of Hong Kong Turnover | N/A | 15.4% |
| Southbound Stock Connect Net Buy/Sell (US $ Millions) | N/A | -829.330268199234 |
| China (Shanghai) | SHCOMP Index | 0.9% |
| China (Shenzhen) | SZCOMP Index | 2.2% |
| China (STAR Board) | Star50 Index | 1.5% |
| Mainland Turnover | .chturn Index | -16.6% |
| Japan | NKY Index | 2.7% |
| India | SENSEX Index | 0.3% |
| Indonesia | JCI Index | 1.1% |
| Malaysia | FBMKLCI Index | 0.3% |
| Pakistan | KSE100 Index | -0.4% |
| Philippines | PCOMP Index | 0.7% |
| South Korea | KOSPI Index | 0.4% |
| Taiwan | TWSE Index | 2.2% |
| Thailand | SET Index | 0.4% |
| Singapore | STI Index | 0.4% |
| Australia | AS51 Index | 0.4% |
| Vietnam | VNINDEX Index | -1% |
| Indicator | Hong Kong | Mainland China |
|---|---|---|
| Today's Volume % of 1-Year Average | 107 | 100 |
| Advancing Stocks | 293 | 3836 |
| Declining Stocks | 205 | 1210 |
| Outperforming Factors | Growth, Liquidity, Momentum | Momentum, Growth, Liquidity |
| Underperforming Factors | Dividend Yield, Low Volatility | Low Volatility, Dividend Yield, Value |
| Top Sectors | Tech, Materials, Industrials | Tech, Materials, Real Estate |
| Bottom Sectors | Real Estate, Staples, Utilities | Healthcare, Staples, Communication |
| Top Subsectors | Semis, Tech Hardware, Paper/Packaging | Electrical Components, Communication Equipment, Base Metals |
| Bottom Subsectors | Food, Commercial/Professional Services, Environmental Protection | Liquor, Securities, Telecom |
| Southbound Connect Buys | SMIC (Very Large), Hua Hong Semi (Large), Gigadevice, YOFC (Small) | N/A |
| Southbound Connect Sells | Alibaba, Tencent (Very Large), HS Tech ETF, HS China Enterprise ETF, HK Tracker ETF (Large) | N/A |
| MSCI China All Shares Index | # of Stocks | Average 1-Day Change (%) |
|---|---|---|
| Hong Kong Listed | 164 | 0.72 |
| Communication Services | 11 | 1.04 |
| Consumer Discretionary | 28 | 0.18 |
| Consumer Staples | 12 | -0.81 |
| Energy | 6 | -0.35 |
| Financials | 25 | 0.33 |
| Health Care | 16 | -0.09 |
| Industrials | 19 | 1.92 |
| Information Technology | 15 | 3.62 |
| Materials | 14 | 3.3 |
| Real Estate | 1 | -1.84 |
| Utilities | 6 | -0.49 |
| Mainland China Listed | 11 | 1.32 |
| Communication Services | 11 | -0.95 |
| Consumer Discretionary | 26 | -0.14 |
| Consumer Staples | 18 | -1.54 |
| Energy | 11 | -0.48 |
| Financials | 64 | -0.67 |
| Health Care | 29 | -1.61 |
| Industrials | 60 | 0.67 |
| Information Technology | 113 | 4.06 |
| Materials | 58 | 2.66 |
| US & Hong Kong Dually Listed | Ticker | 1-Day Change (%) |
|---|---|---|
| Tencent HK | 700 HK Equity | 0.5 |
| Alibaba HK | 9988 HK Equity | 0.8 |
| JD.com HK | 9618 HK Equity | -1.5 |
| NetEase HK | 9999 HK Equity | 5.7 |
| Yum China HK | 9987 HK Equity | -0.6 |
| Baozun HK | 9991 HK Equity | 0 |
| Baidu HK | 9888 HK Equity | 1.3 |
| Autohome HK | 2518 HK Equity | -0.5 |
| Bilibili HK | 9626 HK Equity | 0.4 |
| Trip.com HK | 9961 HK Equity | -2 |
| EDU HK | 9901 HK Equity | -0.1 |
| Xpeng HK | 9868 HK Equity | 3.3 |
| Weibo HK | 9898 HK Equity | 0.1 |
| Li Auto HK | 2015 HK Equity | -0.7 |
| Nio Auto HK | 9866 HK Equity | -0.4 |
| Zhihu HK | 2390 HK Equity | 1.5 |
| KE HK | 2423 HK Equity | -5.3 |
| Tencent Music Entertainment HK | 1698 HK Equity | 2.1 |
| Meituan HK | 3690 HK Equity | -0.9 |
| Hong Kong's Most Heavily Traded by Value | 1-Day Change (%) |
|---|---|
| SEMICONDUCTOR MANUFACTURI-H | 7.6 |
| TENCENT HOLDINGS LTD | 0.5 |
| ALIBABA GROUP HOLDING LTD | 0.8 |
| LENOVO GROUP LTD | 19.8 |
| HUA HONG SEMICONDUCTOR LTD-H | 1.6 |
| KNOWLEDGE ATLAS TECHNOLOGY-H | 26.9 |
| VICTORY GIANT TECHNOLOGY H-H | 16.6 |
| YANGTZE OPTICAL FIBRE AND-H | 5.8 |
| SUNNY OPTICAL TECH | 6.8 |
| MEITUAN-CLASS B | -0.9 |
| Shanghai and Shenzhen's Most Heavily Traded by Value | 1-Day Change (%) |
|---|---|
| BOE TECHNOLOGY GROUP CO LT-A | 10 |
| VICTORY GIANT TECHNOLOGY -A | 13.3 |
| GIGADEVICE SEMICONDUCTO-CL A | 8.5 |
| EOPTOLINK TECHNOLOGY INC L-A | 7.2 |
| ZHONGJI INNOLIGHT CO LTD-A | 4.5 |
| MONTAGE TECHNOLOGY CO LTD-A | 3.7 |
| SUZHOU TFC OPTICAL COMMUNI-A | 10.5 |
| JCET GROUP CO LTD-A | 9 |
| SUZHOU DONGSHAN PRECISION-A | 6.6 |
| SEMICONDUCTOR MANUFACTURIN-A | 3.2 |
Last Night's Exchange Rates, Prices, & Yields
- CNY per USD 6.80 versus 6.80 yesterday
- CNY per EUR 7.88 versus 7.89 yesterday
- Yield on 10-Year Government Bond 1.75% versus 1.74% yesterday
- Yield on 10-Year China Development Bank Bond 1.82% versus 1.82% yesterday
- Copper Price -0.30%
- Steel Price -0.41%
