China Tightens Its Grip on Billions in Offshore Wealth

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1:17Bloomberg Audio Studios. Podcasts, radio, news. Recently, my colleague Lulu Chen, who covers Asia Finance here in Hong Kong, told me a story about a Chinese investor, Tom. Tom's a Beijing-based tech executive. He's been trading U.S. stocks for years. Technically, Chinese citizens aren't allowed to buy and sell shares in foreign markets aside from a few permitted channels. But for years, people like Tom have used Chinese trading apps and online brokers to invest in markets outside of China. from blue chip stocks like Apple and Coca-Cola to the S &P 500 exchange-traded funds. He was doing it through a few Chinese brokerages that are very popular.

2:05One is called Futu, one's called Tiger. These are your equivalent of Robinhood. And because the U.S. stock markets were doing so well, a lot of the trading was done focusing on U.S. stocks. These apps are not authorized to allow Chinese investors to trade in foreign stocks. But in the more than 10 years that these platforms have been operating, Beijing has largely looked the other way. For a while, it seems like all these trades were within the spirit, if not the letter of the law. And then one day Tom gets hit with a$15 ,000 tax bill for his gains trading these stocks. It was the first time the Chinese government had even appeared to be aware of Tom's illegal overseas gains.

2:56Tom thought that, oh, since you're taxing me, maybe this is a form of blessing. But last month, not long after Tom received that tax bill, investors like him got another warning sign. Chinese authorities launching a crackdown on illegal cross-border trading while scrutinizing... On our radar, Chinese regulators plan to find three brokerages for illegal cross-border businesses, including Tiger and Futu. What the government has said is that none of these apps are allowed to allow mainland people to trade offshore stocks anymore. They've given them a two-year time period to unwind all the assets.

3:40Lulu says this ban goes beyond a crackdown on a few brokerages and investors. It's a bigger push by Beijing to tighten control over money leaving the country, especially the overseas flows from wealthy Chinese investors. And while it's impossible to track just how much money flows out of the country, one estimate says that last year alone, roughly$807 billion left China. That's about 4 % of the country's annual gross domestic product. And it's the highest single-year outflow on record. They want to map Chinese offshore wealth and show that moving assets offshore doesn't put these people, these rich people, beyond the reaches of authority.

4:23And ultimately, it's controlling the money flow and making sure that the money is taxed.

4:37This is The Big Take Asia from Bloomberg News. I'm Wan Ha. Every week, we take you inside some of the world's biggest and most powerful economies and the markets, tycoons, and businesses that drive this ever-shifting region. Today on the show, China's crackdown on offshore trading. What Beijing is doing to stop capital from leaving the country and why it now needs that money more than ever.

5:11In late May, the China Securities Regulatory Commission, along with seven other government agencies, announced a sweeping crackdown on what it called illegal cross-border trading. Authorities said they'll penalize brokerages Futu, Tiger Brokers, and Longbridge Securities for operating on the mainland without a license. And they said they'll confiscate what's described as illegal gains, both in China and overseas. This affects hundreds of thousands of Chinese investors who used the popular apps. Now, Lulu, China is clamping down, obviously, on Chinese people who are investing money overseas. Why is this happening?

5:56Well, you first have to understand that investing in China isn't like in the U.S. or Europe. Money cannot flow freely out of the country. There is a capital control mechanism in China. They have a cap in terms of how much people can convert in terms of foreign exchange every year. The quota is 50 ,000 U.S. dollars per person. Now, if you're a Chinese national, why would you want to invest your money outside China? U.S. stocks have been going bunkers this past year. It's a lucrative trade, and the returns are pretty handsome compared with Chinese domestic stock market. I think it also follows a broader shift in sentiment among Chinese households.

6:40We remember after the COVID lockdowns and then China had also the tech sector clampdowns, Xi Jinping's push for common prosperity, all of these things intertwined and it really unsettled both the wealthy and middle class segments of the population. And you compound that with property prices falling, youth unemployment, a lot of affluent families see holding offshore assets more than just diversification. It's also about having a form of insurance and protecting their wealth. But this demand from Chinese investors to move money overseas quickly outgrew the handful of legal channels to do it. Those with at least 500 ,000 yuan in their local brokerage accounts, they can buy Hong Kong companies through this thing called Stock Connect program.

7:35But to get exposure, they have to purchase funds that participate in this program called QD. It stands for Qualified Domestic Institutional Investor Program. And that program has a cap of$176 billion combined. But that really is a fraction of the country's 25 trillion household savings. And the QD programs have been so popular every time they release any quota, it just gets snatched up. That really drove a lot of them to these platforms that operated in a gray zone. In the gray zone, trading platforms like Futu, Longbridge and Tiger Brokers. They became popular with Chinese citizens because they offer lower trading fees and more stock choices compared to the approved channels.

8:23All of these apps, The reason that they took off is because they're quite easy to use. They can just open an account from the mainland and then start trading U.S. assets from there. They could park their money from the mainland into these accounts and then the platforms would give them access to overseas assets. And so before the government cracked down, all these Chinese investors were not paying taxes on the money that they were making through offshore trading. So really, are Tom and all these investors who were trading offshore, were they essentially dodging taxes? Yeah, they were. China has always had laws stating that they tax global income, including investment gains for its citizens, except that it never really implemented this rule until quite recently.

9:19Chinese authorities have tried to rein in foreign investment before. Back in 2022, platforms like Futu were banned from helping mainland investors open new trading accounts. But there was a loophole. Existing clients like Tom were somehow allowed to keep trading. There aren't any official figures on how much money is flowing out of the country illegally. But one estimate from the Institute of International Finance put the total outflow last year at more than$800 billion. But it's not just offshore trading that's draining money out of China. There's the traditional good old just taking sacks of money across the border.

10:02Why not? My bars of gold under my bed. Let me get it out. Yes, yes. Actually, there was a case quite recently. Some lady just tied all the money in one of those tailored vests and was caught at the border. There's also something called smurfing. China has a cap in terms of how much people can convert in terms of foreign exchange every year. So they just group a bunch of people who haven't used their quotas and then use that to move money abroad. And then these people get paid as a reward. There's also underground banks, which have been a very well-documented phenomenon. There's also cryptocurrency in the wild days, Macau casinos.

10:49So Chinese people would just go to Macau and they'd swipe their cards. UnionPay at the time allowed them to swipe their cards and then they could take out cash as a refund. China has cracked down on all of these channels. Why is China concerned about these large-scale capital outflows at this point? The control is there to ensure financial market stability and ensure that currency fluctuation is within boundaries. boundaries. But if you talk to economists, they'll argue, oh, the government isn't worried about capital flight at all because the yuan has become a stronger currency this year and recent flow data points to moderating pressure.

11:36I think it depends on the framework of how you look at things. So if you take the framework of looking at it from authorities, how they deal with businesses and its financial market, it's always been about control, right? Control has been the dominant rationale. So this crackdown is a further example of the government trying to close off these channels through which wealthy Chinese can reduce their dependence on the mainland. And then from the tax perspective, part of the objective is also to control to the extent that they can map offshore wealth and also identify beneficial owners. And it's increasingly clear that to these rich folks, moving your assets offshore doesn't put you beyond the reach of the authorities.

12:25After the break, why China needs to keep its money onshore and how far it will go to tax those overseas gains.

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15:33In its crackdown on illegal cross-border trading, China threatened to slap steep penalties on brokerages that Beijing said violated the country's securities law. The market reaction was immediate. Here's Bloomberg's Lulu Chen. I tank the shares of Futu and Tiger. Tiger has about$6 billion of assets from mainland clients. And this segment accounts for about 25 percent of its revenue. Futu has$26 billion of assets from mainland clients and accounts for about 20 % of its revenue. Both brokerages and a third, Longbridge, said they'll cooperate with regulators and comply with the new rules. But this isn't just about bringing a few brokerages into line.

16:22Lulu says it reflects a broader shift in how Beijing is thinking about offshore wealth, especially right now. China has always said by law that it'll tax its citizens based on global income, but it's never implemented it before. Now with the economy, the plummet in property prices, it's pushing the government to look for new sources of revenue. In fact, we tallied the figures and China property-related revenue for local governments have plunged 48 % over the past five years through 2025. Those local governments are hurting. Many of them borrowed heavily to fund property ventures. And now that the bottom has dropped out of that market, they're struggling to service their debts.

17:11They've been working hard to find new sources of tax revenue. And they've had some success. Nationwide tax revenues from personal income reached a record, about$240 billion last year. But it's not enough. So they're turning their attention to investors in foreign assets. Lulu says the push is still in its early stages. It's really different for each city, each region, the tax bureaus when they call you up. But what we've heard that's consistent is they're retroactively applying these taxes to at least 2018. In some cases, we have also heard like even further. And what the people need to pay for is the 20 percent on investment gains and then also a penalty fee for not paying taxes.

17:58Among the cases that we've been told, some people actually can negotiate with the tax bureau how much they get fined and how much they pay. And it's simply because the amount that they have to pay is so, so significant. China's drive to keep investors' money within its borders has cut off most avenues for wealthy Chinese to move their money offshore. Lulu says any long-term fallout will depend on how the nation's wealthiest citizens respond. and if the Chinese government offers other investment alternatives. Some of the rhetoric that's come out after these crackdowns is that, oh, this is China preparing for more relaxing of official channels so they can make sure that everything is transparent and within legal boundaries and it's paving the way for, you know, more relaxation down the road.

18:50And that certainly is a very optimistic way of looking at things. It's really unclear at this point what the next policies will be. It's an uncertain time for wealthy Chinese and for the investment community. Lulu says the Ripley effects from this crackdown will likely spread beyond a handful of online brokerages and beyond China. Futu, they were a huge player in the IPO market in Hong Kong. And then the whores of law firms, financial advisors, investment funds, all centered around how to help Chinese citizens manage their money overseas. Banks and investment firms with heavy exposure to mainland clients are working hard to figure out what's next.

19:33In the meantime, they're double checking their clients' investments and weighing the needed steps to avoid falling afoul of Beijing. All the global banks have benefited from China's wealth boom, from HSBC, UBS, JP Morgan, Goldman, everyone. I would say that the offshore banks immediately following this crackdown for offshore trading, they might enjoy a short-term boom, in fact, because all the clients who need advice, consulting services. But long-term, it really is about how the Chinese wealthy react to this. It makes how to service Chinese clients offshore very tricky because everyone would need to be concerned about whether they'll become the next Futu or Tiger.

20:23Lots of regulatory landmines to navigate. And it does make the business a lot more complicated for these global banks. I want to zoom out to the rest of the world a bit. If Chinese authorities are able to successfully trap and keep capital so it stays in the mainland, what's the impact, you think, on global markets where Chinese investors have been parking their money? To put things into perspective, if we're sticking with the figures that these two firms have disclosed, which is about$30 billion, that's a drop in the bucket compared with the U.S. stock market. The U.S. stock market is, what, like$70 trillion?

21:07So it won't move the dial on the U.S. market. It has an impact for people who have benefited from Chinese consumers. And that could be anything from the property market, Hong Kong's property market, especially now that it's so reliant on mainland buyers, but also like property markets in Australia and even the U.S., where Chinese buyers are a significant force among, if not ranked like the top, among foreign buyers. Lulu, what do you think is the endgame here for China? They want to map Chinese offshore wealth and show that moving assets offshore doesn't put these rich people beyond the reaches of authority.

21:50One of the people I interviewed said that the risks are just not worth it. So he's going back to the Asia market, the Demos tech market. to trade Chinese domestic shares. And I guess that's in the end, that's what the Chinese government wants, right? Yes, that is.

22:16This is The Big Take Asia from Bloomberg News. I'm Wan Ha. To get more from The Big Take and unlimited access to all of Bloomberg.com, subscribe today at Bloomberg.com slash podcast offer. If you liked the episode, Make sure to subscribe and review The Big Tech Asia wherever you listen to podcasts. It really helps people find the show. Thanks for listening. See you next time.

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