Since December began, Chinese companies that trade on major U.S. exchanges have faced a difficult economic landscape as tensions have escalated between both governments. Early in the month, the U.S. Securities and Exchange Commission (SEC) announced that all international companies that refused to comply with regulatory orders from U.S. agencies would face delisting. While most countries have been cooperating with such policies for years, China has refused thus far. Furthermore, its government was quick to respond with regulatory measures that pressured companies to delist themselves. Today brought the news that several online brokers have been caught in this crossfire. As a result, Chinese stocks in the fintech sector are down today.
What’s Happening With Chinese Stocks?
According to a report from Reuters, China’s government is planning on banning digital brokerage houses from offering offshore trading services to clients based in mainland locations. This poses severe consequences for Chinese stocks such as Futu Holdings (NASDAQ:FUTU) and UP Fintech Holding (NASDAQ:TIGR), two prominent players in China’s fintech market. Both companies allow mainland investors to trade in international markets.
Neither stock has had a good week, and this news isn’t likely to help either one’s performance. FUTU was down all morning. Despite a slight uptick, its only in the green by 0.51% after showing quite a bit of turbulence in the first two hours of trading. Things are worse for TIGR, which is down 7% as of this writing after falling by more than 20% since the week began. It should also be noted that FUTU has also been falling this week, with declines surpassing 13% so far.
Why It Matters
It’s easy to see why this development in China’s regulatory crackdown is bad news for companies in the fintech sector. China has millions of investors who won’t be able to engage in the quick and easy securities trading provided by these platforms. Without the ability to trade in U.S. and U.K. markets, these investors will be forced to seek other options. This will severely restrict the client base of both companies, limiting their utility.
As for the reasons behind the ban, sources have cited data privacy and security, as well as capital overflows. The mention of data concerns calls to mind the same explanation given when Chinese ride-sharing giant Didi Global (NYSE:DIDI) succumbed to pressure to delist from the New York Stock Exchange. When this happened, several prominent Chinese stocks took a hit as well. While it may be a valid concern, the fact remains that China’s restrictions hurt its own companies first and foremost. Although it certainly won’t do any favors for international investors either.
What It Means
At this time, it’s hard for American investors to have much faith in Chinese stocks. Experts are advising against buying even the most prominent Chinese companies, such as Alibaba (NYSE:BABA), due to complications posed by the recent regulatory crackdowns. China’s government doesn’t seem to be planning on stopping any time soon. And until it does, it will be hard to invest in Chinese stocks with confidence.
Futu and Up Fintech may ultimately find ways to compensate for this restriction. However, until they do, they will be among the Chinese stocks that investors should evaluate with plenty of caution.
On the date of publication, Samuel O’Brient 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.