The billionaire who wanted to make investments accessible to the masses, then Beijing held him back

Within a decade he built a company whose operations spanned China, Hong Kong, other markets in Asia and the USA. Similar to his American role model, Lee moved from simple trading services to managing his clients’ wealth through mutual funds and advisory services.

Now, Li’s ambitions collide with the Chinese authorities. His company, Futu Holdings (Futu Holdings) became 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 Foto, which is traded on the 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 approximately $180,000. The news led to an almost 30% drop in Foto’s stock in one day. It has since recovered some of the decline, and today the company’s market value stands at $15 billion. The drop in the stock price wipes out hundreds of millions of dollars from Lee’s fortune, which is currently estimated at about $5.7 billion, according to Forbes.

Li, whose Chinese name is Li Hua, says that Putu is cooperating with the Chinese authorities. The company told investors that as of March 31, only 17% of its clients’ assets were held in the accounts of clients from mainland China, and these were responsible for a fifth of its revenues. The company anticipates that its growth rate around the world will accelerate. The regulatory measures against Foto and its competitors are just part of Beijing’s efforts to reshape the financial reality for China’s super-rich.

In the past, a financial loophole allowed the Chinese tech elite to issue their companies in Hong Kong or elsewhere and accumulate capital outside of China, far from the reach of Chinese authorities. New regulation effectively closed that path. At the end of July, China confirmed that it would impose a tax on trusts held outside the country, which used to be a popular vehicle among wealthy Chinese for holding assets abroad.

Legally, China prohibits its citizens from investing in stocks and real estate abroad without government approval. However, in the past decade, private investors have opened trading accounts at Foto and similar companies through websites in Hong Kong or by physically arriving in the city, according to Chinese government media. Although Hong Kong is part of China, it operates its own freely traded currency and a separate financial system, developed under British rule.

Private investors financed 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 the Chinese government media. In May, the Chinese Securities Authority determined that these funds may not be used to finance investments abroad, and fined Foto and two other brokerage firms. The companies are now banned from offering their services in China. Clients from mainland China can no longer deposit funds or make new investments, but only sell their holdings.

Service to the wealthy in China

Lee, who is in his late 40s, was among the first to benefit from the loophole that made it possible to accumulate capital outside of China. He was the 18th employee at Tencent, currently the most valuable public company in China. He got shares in the company early on, and when Tencent floated its shares in Hong Kong in 2004, he became rich overnight. In those days it was easy to convert capital accumulated in Hong Kong into other currencies.

Li founded Futo in 2012, when a surge in the amount of Chinese capital held outside the country contributed to Hong Kong’s transformation into a hub for money managers providing services to the super-rich. According to a profile article published in 2023 in Hunan Today, a Chinese newspaper published in Li’s home province, he found the process of buying and selling securities around the world through traditional brokerage firms cumbersome and unsatisfactory. That is why he invested about 5 million dollars of his money in establishing a trading platform.

Foto wanted to lower the investment costs and make it accessible even to those who have no experience in the market, a goal that reminded me of the path of Charles Schwab. In 1975, US regulators eliminated fixed commissions on trading, dismantling a decades-old system that protected brokers from competition. As a result, Schwab founded one of the first discount brokerage firms.

Initially, Li marketed the platform to Chinese citizens and 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 issued his photo on Nasdaq.

In Foto’s early days, Li cultivated relationships with founders and executives in the Chinese tech industry, who became clients of a service the company launched to help Chinese companies issue shares and sell them to investors. In 2019, Foto helped tech giant Alibaba raise $11 billion in Hong Kong by selling shares to its clients, one of many IPOs Foto was involved in.

Lee also benefits from his ties to Tencent, which was one of the first investors in Foto. The tech giant’s employees became Photo customers, cashed in the profits they earned from Tencent stock options and used the money to trade on Photo’s platform, Lee told a conference in 2020.

Later, Li began managing plans to hold shares of Chinese companies issued abroad, which connected Futo to additional pools of affluent clients. “We mainly serve the new affluent population in China,” Futo said in 2021, when she sold additional shares in the US. According to her, the median age of her high-income clients was 34, and in the previous year they traded an average volume of one million dollars.

As more Chinese companies were issued abroad, Futo established an arm that helped extremely high-net-worth owners establish their own investment offices to manage their money. In its 2021 IPO, Futo noted that it is “working to take advantage of a tremendous opportunity to help promote a once-in-a-generation change in the wealth management industry.”

The regulators are not happy

The Chinese authorities did not like the direction. At the end of 2022, they announced that Foto is operating in mainland China without the required licenses. Soon after, the company removed its app from app stores in mainland China. However, Chinese authorities say Futo continued to allow mainlanders to deposit funds into accounts and trade.

Before the fine imposed on it in May, Foto was at its peak, with more than 30 million users worldwide. The total volume of trading on the platform reached a record of about 530 billion dollars in the first quarter of this year. Most of the amount came from clients who traded stocks in the US and Hong Kong, and many of them sought to benefit from the surge in artificial intelligence stocks. By comparison, Robinhood, a favorite of private investors in the US, registered a stock trading volume of $638 billion in the first quarter.

The aim of the latest enforcement measures is to direct Chinese private investors to authorized platforms within the country, where they can trade on China’s domestic exchanges. Citizens are still allowed to invest abroad, but today mainly through government-approved channels, where profits are repatriated in yuan.

Photo doesn’t have a domestic platform with such a license, so it is now focusing on operations outside mainland China, including Southeast Asia and Hong Kong, where it says one in two adults use Photo.

Like Schwab, Lee wants to divert the company’s activities towards offering investment products such as mutual funds to customers. Although securities trading still accounts for the largest share of Photo’s revenue, its wealth management division is growing. “We continue to expand the boundaries of financial services,” he told me in May, when he presented Foto’s results for the first quarter.

This article was translated by Globes exclusively from The Wall Street Journal. Link to the original article in English.