Professor Xiang Fang
24 June 2026
Recently, the China Securities Regulatory Commission (CSRC) introduced a new plan to rectify problems in cross-border securities, futures, and fund business activities. With the support of the Securities and Futures Commission of Hong Kong and the Hong Kong Monetary Authority, the rules governing the opening of securities investment accounts in Hong Kong by Mainland clients were also updated simultaneously.
Under the regulatory rectification plan, illegal cross-border business activities by overseas securities, futures, and fund institutions will be completely banned within two years. Existing clients may sell but may not buy, and all Mainland websites, trading software, and ancillary services will be shut down. Meanwhile, Futu Securities, Tiger Brokers, and Long Bridge Securities have been severely penalized for engaging in illegal cross-border business solicitation and activities.
Strict enforcement of existing laws and regulations
The rectification plan may be described as a forceful crackdown targeting cross-border investment in securities, futures, and funds. Under existing laws and regulations, Mainland residents are subject to an annual aggregate quota of US$50,000 per person for foreign-exchange settlement and purchase, which may be used only for purposes such as overseas travel and study, and not for overseas property purchases, overseas investment, life insurance or similar purposes. Strictly speaking, Mainland residents may not use foreign exchange converted from domestic funds to engage in overseas securities investment. This is also the basis on which institutions require account-opening applicants to demonstrate that their funds come from legitimate overseas sources.
In practice, brokerages may not always be fully rigorous in verifying users’ sources of funds. Some brokerages also circumvent existing regulations by various means, entering the Mainland market to advertise, solicit clients, and provide trading facilities and services. The above-mentioned brokerages that were heavily penalized fall into this category. Therefore, the rectification plan is not a new regulation on overseas investment by Mainland residents, but rather the strict enforcement of existing laws and regulations.
China has long maintained a cautious stance towards capital account convertibility. The current framework for managing capital flows mainly comprises two mechanisms. First, China has established the Qualified Foreign Institutional Investor (QFII) mechanism for investment in Mainland securities by qualified foreign institutional investors, and the Qualified Domestic Institutional Investor (QDII) mechanism for investment in overseas securities by qualified domestic institutional investors, allowing relevant institutions to conduct cross-border capital flows and transactions. Both are subject to quota management. Second, China has established multiple cross-border mutual market-access channels, such as the Shanghai-Hong Kong Stock Connect, the Shenzhen-Hong Kong Stock Connect, and Bond Connect, through which investors can legally invest in specified overseas assets.
Potential benefits of moderate capital account management
In international academia and public policy circles, views on the free movement of capital have changed significantly over the past several decades. In the 1990s, the mainstream view was that late-developing countries should promote the full liberalization of the capital account in order to achieve efficient cross-border allocation of capital. As this idea gained wide acceptance, cross-border capital flows grew rapidly. However, in the years that followed, many countries that advanced capital account liberalization, for example, Mexico, Turkey, and South Korea, experienced financial crises of varying severity. In some countries, crises were triggered by the withdrawal of foreign capital. In others, although the crises originated domestically, the sudden withdrawal of foreign capital further exacerbated them. The mainstream view accordingly reversed.
By 2012, the International Monetary Fund acknowledged in its documents that full capital account liberalization might not be suitable for late-developing countries. The academic community has since conducted extensive research on this issue, examining whether capital account management policies are appropriate as a macroprudential tool and offering recommendations on how to implement optimal macroprudential capital account management. According to my recent research with Professor Yang Liu of the University of Hong Kong, Professor Sining Liu of Soochow University, capital account management is conducive to lowering exchange-rate risk in late-developing countries, thereby reducing local-currency financing costs.
The art of balancing financial openness and stability
The main threat posed by the free movement of capital to an economy comes from sudden disruptions in capital inflows, including large-scale outflows of domestic capital and the withdrawal of foreign capital. If these occur within a short period of time, they will seriously affect the stability of domestic financial markets. To prevent the sudden withdrawal of foreign capital, a starting point can be to limit large-scale inflows of foreign capital. Managing capital inflows in a macroprudential manner can help mitigate potential capital outflows. This helps to explain the Chinese authorities’ concern about large inflows of foreign capital: if foreign capital is rapidly withdrawn as a result of changes in risk appetite, confidence, or other factors, it will trigger sharp fluctuations in domestic financial markets.
China has steadily and prudently promoted financial openness over the past dozen years. In particular, over the last five or six years, compliant funds for domestic investment in overseas securities have grown by as much as threefold, and the trend of China’s gradual financial opening remains unchanged. At the same time, China’s regulatory focus on capital and financial account transactions that have not yet been fully liberalized stems from its concern that rapid capital withdrawal could endanger domestic financial stability. From the perspective of macroprudential regulation, regulators may consider further refining the management of foreign capital. Research by Professor Haonan Zhou of the University of Hong Kong indicates that, in terms of the stability of funding sources, not all international capital should be treated alike. Long-term capital, such as insurance funds, pension funds, and bank funds, tends to exhibit relatively stable investment behaviour and is less affected by international financial turbulence. Short-term capital, such as mutual funds and hedge funds, is more susceptible to financial market volatility. Therefore, in order to manage capital flows with greater precision, regulators should conduct tiered monitoring and management based on the nature of different types of capital and their respective sensitivity to international and domestic financial factors.
Prudent policymaking requires adapting to circumstances
It is worth noting that concern over funding disruptions caused by large-scale capital outflows is another logical basis for the Chinese authorities’ cautious approach to capital outflows. Domestic capital is formed within China and can be managed only by regulating capital outflows. The recent rectification plan targeting overseas securities investment activities is also mainly driven by this rationale. At the same time, regulators must recognize that, against the backdrop of increasing uncertainty in the international environment, many investors have genuine demand for cross-border investment for purposes such as sharing in investment returns and diversifying risks. In the medium to long term, the appropriate response should favour guidance over obstruction, with a focus on maintaining a balance between controlling financial risks and meeting cross-border investment needs.
In fact, while rectifying grey-area cross-border securities trading, regulators may also consider correspondingly expanding the scope of lawful cross-border securities investment. For example, they could lower the thresholds for QFII and QDII quotas and expand the coverage of various mutual market-access mechanisms, so that investors can make up for losses in one area with gains in another, thereby further advancing gradual financial opening-up. As with the management of foreign capital, in promoting policies to prudently broaden lawful channels for cross-border securities investment, the authorities should focus on designing effective mechanisms to screen for relatively stable funds, so as to facilitate the sharing of global investment returns and meet the need for risk diversification.
