Futu Holdings, an online brokerage and wealth management platform, has plunged 26% before the bell and is now trading just under $50 a share, while fellow online brokerage UP Fintech is down 17% in the premarket at $7.36 a share. The sharp downturn in the two Chinese stocks begs the question: What is going on?
Beijing Crackdown Hits Chinese Stocks
The tanking of FUTU and TIGR stocks comes after Chinese authorities in Beijing have trained their sights on online brokerages, declaring them “illegal” in the country of 1.4 billion people. The Chinese government issued a warning overnight that unlicensed online brokerages are “breaking the law.” The warning has raised fears that regulatory actions to curtail online brokerages are about to go into effect and will hurt the businesses of both Futu Holdings and UP Fintech Holding.
Beijing has previously targeted other economic sectors ranging from large technology companies such as Alibaba (NYSE:BABA) to ride-hailing and food-delivery firms such as Didi Global (NYSE: DIDI). In each case, the stocks of targeted companies have dropped sharply.
Pushing Shares Lower
Late Wednesday, Oct. 27, China’s central bank said that online brokerages that are not licensed are conducting illegal business if they serve Chinese clients by way of the Internet. FUTU stock cratered following the announcement and TIGR stock dropped as well. Before today’s big decline, FUTU shares had been up 37% year-to-date at $67.02 a share.
However, FUTU stock has come down more than 25% over the past three months on mounting fears of government regulations crimping its business. TIGR stock had gained only 2% on the year and closed trading on Wednesday at $8.85 per share.
New Law Set to Hit Chinese Stocks?
The BNN Bloomberg, quoting The People’s Daily newspaper, which is the public voice of China’s Communist Party, said that the two online brokerages, which enable Chinese citizens to invest in foreign stock markets in the U.S. and Europe, are likely to be subject to a new law that goes into effect on Nov. 1.
The Personal Information Protection Law, will impose stricter regulations on how consumer data is sent outside the country. This is likely to cause big problems for Futu and UP Fintech as neither company currently has a brokerage license in China.
Currently, Chinese citizens can open accounts with Futu and UP Fintech after they provide personal financial information online, a practice that Beijing is now calling “illegal.”
What’s Next For FUTU And TIGR Stocks
Exactly how the new law will impact UP Fintech and Futu Holdings remains unclear. It’s not known if the online brokerages will have to cease operations in China. But the latest comments from Chinese authorities and the impending new law are creating a lot of uncertainty for Futu Holdings and UP Fintech and their stocks are sinking as a result.
The crackdown on online brokerages follows a recent trend of heightened risk when investing in China-based stocks. While Futu Holdings and UP Fintech Holding still present growth opportunities, they face unpredictable regulatory risks that make them an unstable investment. Investors should proceed with caution.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.