China bans new offshore brokerage accounts in capital control move. According to an official document seen by Reuters and corroborated by four sources, China has, for the first time, issued a notice forbidding domestic brokerages and their overseas affiliates from hiring new mainland customers for offshore trading.

According to the notification, new investments made by current mainland clients must also be “strictly monitored” to stop investors from evading China’s foreign exchange restrictions. Reuters was the first to break the story.

The steps, which would limit capital outflows, come as foreign investment has increased in response to the second-largest economy in the world’s failing development. This has put pressure on the yuan and prompted officials to step up attempts to stabilize the currency.

One of Asia’s worst-performing currencies, the yuan, has fallen 5.5% this year as China’s post-pandemic economy has sputtered,d and the dollar has risen due to interest rate differences and global geopolitical unrest.

Because of this, authorities have had to announce several policies in recent months to stop the drop. In a notification published on September 28 by its Shanghai division, the China Stocks Regulatory Commission (CSRC) instructed brokerages to stop trading stocks from overseas accounts, such as Hong Kong, to new mainland customers.

The notification said that cross-border securities broking, lending of securities, fund sales, and investment counseling are all prohibited activities. The new directive’s effective date was unclear, but the sources claimed they thought the regulator meant immediately. The letter further stated that offline channels for creating accounts should be discontinued and that a deadline of the end of October had been set for removing applications and websites luring mainland customers.

The sources declined to give their names because they were not authorized to speak to the media. A Reuters request for comment received no response from the CSRC.

Shujin Chen, head of Jefferies’ China finance and real estate research, stated, “We believe the main policy purpose is to curb capital outflows, especially in the context of yuan depreciation pressure.”

“From an industry perspective, the impact will be greater on brokerage firms with larger offshore retail business.”

Offshore trading services are a significant source of income for state-owned brokerages, including Citic Securities (600030. SS), CICC (3908. HK), and Haitong Securities (600837. SS) (0665. HK). The three brokerages did not immediately answer requests for comment from Reuters.

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The restriction on foreign investments made through domestic brokers follows the withdrawal of applications by two online brokerages in China, Futu Holdings Ltd. and UP Fintech Holding Ltd., in May due to Beijing’s increased emphasis on data security and capital outflows.

The CSRC said in December last year that the two brokerages had engaged in cross-border securities trading with domestic clients without obtaining regulatory approval. A few months later, a source who knew the situation told Reuters that Shanghai brokerage Guotai Junan had received a similar informal order.

According to state media in February, certain Hong Kong branches of Chinese brokerages stopped creating accounts for clients from the mainland after receiving informal advice from the CSRC intended to deter illegal money outflows.

Using offshore brokerage accounts in Hong Kong necessitates exchanging yuan for foreign currencies. Chinese investors can still invest abroad through the Stock Connect with Hong Kong, qualified domestic institutional investors, qualified domestic limited partnership programs, and quota-based qualified domestic institutional investors.

They can use select foreign brokerage platforms outside mainland China if cash is stashed overseas. According to a research note from Hwabao Securities, 27 listed Chinese securities brokerages had established offshore operations by the end of 2022, with the larger ones providing offshore trading services to mainland clients.