Why Futu and Up Fintech Led the Nasdaq Lower Friday

Wall Street didn’t like 2022 much, and it was a particularly bad year for Nasdaq Composite (^IXIC -1.06%). The index fell another 1% on Friday morning, bringing losses for the year to 34% and marking a sharp reversal from the huge gains the Nasdaq has enjoyed in each of the previous three years.

There are many people to blame for the poor performance of the Nasdaq over the past year, but one fact about the index that differs from other stock market benchmarks is that the Nasdaq Composite includes the performance of foreign companies that list their shares on the exchange.

In fact, you will find several foreign companies among the elite ranks of The Nasdaq 100 indexand sometimes what happens to these companies can have an effect on the wider market.

Today shares are off Futu Holdings (FUTU -27.25%) and Up Fintech Holding (TIGER -27.30%) is moving sharply lower, and it is just the latest of several instances during 2022 where companies with exposure to the Greater China region have weighed on the Nasdaq.

Chinese regulators are not happy

Shares of Up Fintech and Futu were both down around 25% in mid-morning trading on Friday. The online brokerages drew attention from securities regulators in China, and both face allegations that they broke the law in ways that could prove problematic for their business models.

The China Securities Regulatory Commission (CSRC) issued a statement on Friday questioning how Futu and Up Fintech have allowed individual investors within mainland China to invest in stocks and other investments outside the country. China has strict controls on capital outflows, and as the CSRC sees it, Futu and Up Fintech have been operating illegally in violation of these controls.

The CSRC asked Futu and Up Fintech to stop allowing new mainland China customers to sign up for their respective fintech platforms. Those who are already customers will be allowed to trade securities with Futu and Up Fintech, but they will not be able to make further deposits as they will potentially breach capital movement restrictions.

The two companies acknowledged the CSRC’s comments as they sought to reassure investors that their businesses are not at risk. Futu expects to cooperate with regulators to ensure that it can continue to operate in compliance with all laws and regulations within mainland China.

Up Fintech claimed that it will continue to provide services to its current customers but take corrective measures to stop acquiring new customers as specified by the CSRC.

Is China a safe place to invest?

The news is particularly bad for Futu, which had hoped to open the stock for trading under a dual listing in Hong Kong. Futu delayed the move, probably in light of recent events.

Futu and Up Fintech have both sought to capitalize on the growing interest among Chinese citizens to invest online. Exposure to multiple markets has been part of the draw for clients, as the platforms offer services that traditional brokers in China do not.

More broadly, the episode marks the latest conflict between internet-based businesses and the Chinese government. Companies much larger than Futu and Up Fintech have been caught up in political wrangling, creating considerable uncertainty for foreign investors.

Some people have simply given up on Chinese stocks, worrying that the government could change the rules at any time and take away opportunities to make money from companies.

Regardless, China will continue to play a key role in the global economy, and its citizens may have an ever-increasing influence on the investment world. However, much of it depends on what the Chinese government does, and tight restrictions could limit not only Futu’s and Up Fintech’s prospects, but also the country’s entire economy.