The billionaire who became China's Charles Schwab, then Beijing decided to act against him
Li Hua's brokerage firm, Futu Holdings, has become one of the main targets in the government's campaign to control the flow of funds from China abroad.
Li Hua said his inspiration was Charles Schwab. The Chinese billionaire founded his brokerage firm in 2012 with a simple goal: to make stock investing accessible to the masses in Asia.
Within a decade, he built a company whose operations spanned China, Hong Kong, other Asian markets, and the USA. Similar to his American role model, Li moved from simple trading services to managing his clients' wealth through mutual funds and advisory services.
Now, Li's ambitions are clashing with the Chinese authorities. His company, Futu Holdings, has become one of the main targets in the authorities' efforts to curb the flow of funds from China abroad.
Reshaping reality
In May, the authorities imposed a $271 million fine on Futu, which trades on NASDAQ, for providing brokerage services and offering mutual funds to clients in mainland China without a license. As part of the measures, Li himself was also fined about $180,000. The news led to a drop of almost 30% in Futu's stock in one day. Since then, it has recovered from some of the declines, and today the company's market value stands at $15 billion. The decline in the stock price wiped out hundreds of millions of dollars from Li's fortune, which is currently estimated at about $5.7 billion, according to Forbes.
Li, whose name in Chinese is Li Hua, says that Futu is cooperating with the Chinese authorities. The company told investors that as of March 31, only 17% of its clients' assets were held in accounts of clients from mainland China, and these accounted for a fifth of its revenues. The company expects its growth rate around the world to accelerate. The regulatory measures against Futu and its competitors are only part of Beijing's efforts to reshape the financial reality for the super-rich in China.
In the past, a financial loophole allowed the Chinese technology elite to list their companies in Hong Kong or elsewhere and accumulate capital outside of China, far from the reach of the Chinese authorities. New regulation effectively closed this path. At the end of July, China confirmed that it would impose a tax on trusts held outside the country, which were previously used as a popular tool among wealthy Chinese to hold assets abroad.
Legally, China prohibits its citizens from investing in stocks and real estate abroad without government approval. However, over the last decade, private investors have opened trading accounts at Futu and similar companies via websites in Hong Kong or by physically arriving in the city, according to Chinese state media. Although Hong Kong is part of China, it operates its own freely traded currency and a separate financial system, which developed under British rule.
Private investors funded the accounts using an annual quota of $50,000, which the authorities allow to be transferred abroad for tourism or business travel purposes, according to reports in Chinese state media. In May, the China Securities Regulatory Commission ruled that these funds must not be used to finance investments abroad, and fined Futu and two other brokerage firms. Now, the companies are prohibited from offering their services in China. Clients from mainland China can no longer deposit funds or make new investments, but only sell their holdings.
Services for the wealthy in China
Li, who is in his late 40s, was among the first to benefit from the loophole that allowed accumulating capital outside of China. He was the 18th employee at Tencent, now the highest-valued public company in China. He received shares in the company at an early stage, and when Tencent listed its shares in Hong Kong in 2004, he became rich overnight. In those days, it was possible to easily convert capital accumulated in Hong Kong into other currencies.
Li founded Futu in 2012, when a surge in the volume of Chinese capital held outside the country contributed to making Hong Kong a hub for money managers providing services to the super-rich. According to a profile piece published in 2023 in the Chinese newspaper Hunan Today, which is published in Li's home province, he found that the process of buying and selling securities around the world through traditional brokerage firms was cumbersome and unsatisfactory. Therefore, he invested about $5 million of his own money in establishing a trading platform.
Futu sought to lower investment costs and make it accessible even to those without market experience, a goal that recalled Charles Schwab's path. In 1975, US regulators abolished fixed commissions on trading, thereby dismantling a decades-old system that protected brokers from competition. Following this, Schwab founded one of the first discount brokerage firms.
Initially, Li marketed the platform to Chinese citizens and the approximately 7 million residents of Hong Kong, and later expanded under the Moomoo brand to the USA, Singapore, Japan, Malaysia, and Australia. In 2019, he took Futu public on NASDAQ.
At the beginning of Futu's journey, Li cultivated ties with founders and executives in the Chinese technology industry, who became clients of a service the company launched to assist Chinese companies in issuing shares and selling them to investors. In 2019, Futu helped tech giant Alibaba raise $11 billion in Hong Kong by selling shares to its clients, one of many IPOs Futu was involved in.
Li also benefited from his ties with Tencent, which was one of the first investors in Futu. Employees of the tech giant became Futu clients, realized the profits they accumulated from Tencent stock options, and used the money to trade on Futu's platform, Li said at a conference in 2020.
Later, Li began managing stock holding plans for Chinese companies that went public abroad, which connected Futu to additional pools of wealthy clients. "We mainly serve the new wealthy population in China," Futu stated in 2021, when it sold additional shares in the USA. According to the company, the median age of its high-income clients was 34, and in the previous year, they traded an average volume of $1 million.
As more Chinese companies went public abroad, Futu established a division that helped ultra-high-net-worth individuals set up their own investment offices to manage their money. In its 2021 IPO, Futu noted that it is "working to seize a massive opportunity to help drive a once-in-a-generation shift in the wealth management industry."
Regulators are not happy
The Chinese authorities did not like the direction. At the end of 2022, they announced that Futu was operating in mainland China without the required licenses. Shortly thereafter, the company removed its app from app stores in mainland China. However, the authorities in China claim that Futu continued to allow mainland residents to deposit funds into accounts and trade.
Before the fine imposed on it in May, Futu was at its peak, with more than 30 million users worldwide. The total trading volume on the platform reached a record of about $530 billion in the first quarter of the year. Most of the amount came from clients who traded stocks in the USA and Hong Kong, and many of them sought to benefit from the surge in artificial intelligence stocks. For comparison, Robinhood, a favorite among private investors in the USA, recorded a stock trading volume of $638 billion in the first quarter.
The goal of the latest enforcement measures is to channel private Chinese investors to licensed platforms within the country, where they can trade on China's local stock exchanges. Citizens are still allowed to invest abroad, but today mainly through channels approved by the government, where profits are returned in yuan.
Futu does not have a local platform with such a license, so it is now focusing on operations outside of mainland China, including in Southeast Asia and Hong Kong, where it says one in every two adults uses Futu.
Like Schwab, Li wants to shift the company's operations toward offering investment products like mutual funds to clients. Although securities trading still accounts for the largest share of Futu's revenues, its wealth management division is growing. "We continue to expand the boundaries of financial services," Li said in May, when presenting Futu's results for the first quarter.
