What happened
After getting off to a blistering start in 2021, Futu Holdings (FUTU +6.86%) finished the year down 5.4%, according to data provided by S&P Global Market Intelligence.
The fintech was one of many Chinese companies affected by a wave of regulations laid down by China's leadership during the year. The stock suffered massively as a result.
Image source: Getty Images.
So what
Shares of Futu Holdings, an online brokerage that operates in China, gained 234% during the first two months of the year. Despite that massive run-up, the stock gave up those gains and then some, finishing down on the year.
A few factors have rocked Chinese companies. For one, the United States has cracked down on Chinese companies listed in the U.S. In December, the Securities and Exchange Commission (SEC) finalized rules to implement the Holding Foreign Companies Accountable Act. These rules allow the SEC to delist a company if the Public Company Accounting Oversight Board cannot audit requested reports for three years.
Not only that, but regulators in China have cracked down on their companies, too. They have introduced legislation targeting the technology, cryptocurrency, and real estate industries throughout last year. The regulators say the new measures are to weaken monopolies in the country and protect consumers.
Futu Holdings has also faced direct scrutiny from regulators in China. In August, the Chinese newspaper People's Daily suggested that Futu and fellow brokerage Up Fintech Holding may be violating new data privacy laws laid out by China's Personal Information Protection Law.
Not only that, but Sun Tianqi, head of the Financial Stability Department of China's central bank, warned: "Financial licenses have national boundaries. Overseas institutions with only overseas licenses conducting business in mainland China is illegal financial activity." While Futu Holdings has licenses in Hong Kong, Singapore, and the United States, it does not have a license in China.
Now what
Futu has seen impressive growth, with revenue up 159%, and net income up 191% in the first nine months of 2021. But investors are looking past those results with concern about the future of Chinese stocks.
Many Chinese companies have been caught in regulatory crosswinds, including Alibaba Group Holding, JD.com, and Tencent Holdings. Both the United States and China have implemented policies that add a lot of uncertainty regarding investments in China, and investors are on guard about more to come.
Despite the growth of China, regulations pose a considerable risk, and investors are best off staying away from these stocks until this uncertainty clears up.
