Summary of Key Points
Recently, regulatory authorities have taken stringent measures to crack down on illegal cross-border securities investment channels (such as internet brokers like Futu and Tiger). These institutions have been required to stop providing new buying services for domestic investors within two years, allowing only the sale of existing assets. As a result, approximately HK$200-250 billion in funds that were previously allocated through illegal channels will need to be reallocated to compliant channels (such as the Stock Connect, QDII funds, and Cross-Border Financial Management Services). However, these compliant channels have significant shortcomings: QDII quotas are tight, leading to purchase restrictions and high premiums; the Stock Connect does not allow direct investment in U.S. tech stocks; and the Cross-Border Financial Management Service is limited to residents of the Guangdong-Hong Kong-Macao Greater Bay Area. Additionally, a new policy has been announced that will establish regulations for individual overseas direct investment (ODI), sparking discussions about the potential expansion of compliant channels for international investments.
I. Regulatory Measures Shutting Down Illegal Channels
On May 22, eight departments, including the China Securities Regulatory Commission, jointly issued a plan to ban illegal cross-border operations by foreign institutions within two years. On the same day, brokers like Futu and Tiger were placed under investigation and were instructed not to open new accounts for domestic investors or allow new fund transfers; they could only facilitate the sale of existing assets by current users.
In simple terms: Previously, you could directly buy U.S. or Hong Kong stocks through these apps, but now that route is closed. New users cannot use them, and existing users can only sell their assets and withdraw their money.
II. QDII Funds Becoming Popular but Unattainable Due to Quota Restrictions
With the closure of illegal channels, investors have flocked to QDII funds (which are legal ways to invest in overseas markets), but the foreign exchange quotas allocated to fund companies are insufficient.
- Purchase Restrictions: QDII funds targeting U.S. stocks, such as those managed by Guotai and Tianhong, have suspended new subscriptions or limit purchases to a few dozen or hundreds of yuan per day (e.g., the S&P 500 ETF-linked funds). According to Wind data, more than half of QDII funds for U.S. stocks are subject to purchase restrictions.
- High Premiums: Due to the scarcity of foreign exchange, investors are buying existing shares on the secondary market at higher prices than the fund's net value (e.g., the Huitianfu U.S. 50 ETF is trading at a premium of nearly 6%). This is similar to buying concert tickets at inflated prices.
III. Challenges with the Three Compliant Channels
While there are three legal channels for investing overseas, each has its own issues:
1. Stock Connect: The most established channel for Hong Kong stocks, but it does not cover U.S. tech stocks like NVIDIA or Microsoft.
2. QDII Funds: Allow investment in U.S. and European markets, but quotas are limited, leading to purchase restrictions or high premiums. Moreover, investors can only buy funds, not individual stocks.
3. Cross-Border Financial Management Service: Limited to residents of the Guangdong-Hong Kong-Macao Greater Bay Area, making it inaccessible to most people.
IV. Where to Go with the HK$20-25 Billion in Existing Funds?
The HK$20-25 billion in funds from illegal channels needs to be reallocated, and different investors are making different choices:
- Young, high-frequency traders: They may switch to the Stock Connect or QDII funds, such as NASDAQ 100 ETFs or tech stocks available through the Stock Connect.
- High-net-worth clients: These clients prefer bank wealth management services that offer comprehensive solutions like global account management and tax planning, which internet brokers cannot provide.
V. Individual ODI: A Possible New Path Forward?
A new policy on June 1 proposed to establish regulations for individual overseas direct investment (ODI), marking the first time such regulations have been explicitly outlined at the administrative level.
- Optimists: Expect more flexible channels for international investments in the future, such as direct investment in foreign startups or funds.
- Cautions: The policy is still preliminary, and details about investment limits, eligible assets, and procedures are not yet clear, so significant changes are unlikely in the short term.
Conclusion
The closure of illegal cross-border channels has led to a surge in demand for compliant options. The main issues currently are tight QDII quotas and high premiums. Existing funds are being reallocated to the Stock Connect and QDII funds, but these channels have their limitations. Individual ODI represents a potential new direction, though specific details are still pending. For ordinary investors, the most practical options are QDII funds or the Stock Connect for investing in Hong Kong stocks—although there are restrictions, these methods are legal and secure.