HSBC, AIA shares slide 6% as China tightens cross-border rules

China's push to close loopholes in cross-border capital controls sent shares of Asia-exposed financial firms tumbling Thursday, with HSBC Holdings Plc falling as much as 6% in London and AIA Group Ltd. dropping 6.8% in its worst session since March.

"The changes introduce marginally more friction to the sales process of financial products, but these regulations are aimed at better enforcing existing rules rather than disrupting the system," analysts at Jefferies said in a research note.

Standard Chartered Plc slid 5.5% in London, while Prudential Plc fell 7.6% to an eight-month low of 9.87 pounds. In Hong Kong, AIA plunged 6.75%, HSBC declined 0.34%, and Bank of East Asia Ltd. — whose Shanghai branch suspended opening such accounts — fell 2.4%. The moves followed reports that some banks halted opening Hong Kong accounts for mainland Chinese clients that could be used for overseas investments.

The crackdown threatens a key revenue stream for Hong Kong's financial sector, which has relied on mainland Chinese visitors for insurance premiums, brokerage commissions, and banking fees. The China Securities Regulatory Commission and seven other agencies on May 22 unveiled a sweeping two-year rectification plan targeting illegal cross-border securities, futures, and fund businesses, with more than $330 million in combined fines already levied against three online brokers.

The regulatory push has already reshaped the competitive landscape. Online brokers Tiger Brokers, Futu Holdings Ltd., and Long Bridge HK Ltd. have stopped opening accounts for mainland residents holding only mainland ID cards. Tiger Brokers will bar existing mainland-based users from opening new positions or adding to current holdings starting June 12, according to Caixin.

Hong Kong's Securities and Futures Commission and the Hong Kong Monetary Authority updated rules for mainland clients opening investment accounts around the same time, narrowing the gray area around offshore trading. Licensed brokerages and banks must now conduct additional checks to verify that clients' investment funds come from legitimate sources outside the mainland.

Mainland Investors Rush to Hong Kong

The tighter rules triggered a surge of mainland visitors opening accounts in person. Crowds gathered outside branches of Chief Securities and uSMART Securities at Hong Kong's West Kowloon high-speed rail station Wednesday, with many holding only mainland identity cards. At a nearby HSBC branch, dozens queued to open savings accounts, some planning to use them later for trading accounts.

The rush shows the scale of capital that has flowed through Hong Kong's financial system. Mainland residents remain subject to strict capital controls, including an annual foreign-exchange quota of $50,000 per person intended for personal consumption — not for capital-account transactions such as offshore securities. China has also exchanged tax information with Hong Kong under the Common Reporting Standard since 2018, giving mainland tax authorities visibility into financial accounts held by mainland residents in the city.

Insurance Sector Caught in the Crossfire

Insurers face particular exposure. AIA and Prudential rely heavily on mainland Chinese visitors to Hong Kong to purchase insurance products, and any sustained disruption to cross-border account openings could weigh on new business growth. Jefferies analysts said it appears "highly unlikely" that the regulations will have a "discernable impact on the insurers," though the market reaction suggests investors are pricing in greater risk.

The last time China tightened cross-border capital controls in a comparable manner was during the 2015-16 crackdown, when authorities closed down underground banking channels and restricted outbound remittances. That campaign reduced China's capital outflows by an estimated $200 billion over two years, according to central bank data.

This article is for informational purposes only and does not constitute investment advice.