* Campaign to target foreign brokers seeking Chinese

clients

* Hong Kong SFC also finds 'deficiencies' at 12 brokers

* Shares in Futu, Tiger tank pre-market; PDD, Alibaba ( BABA )

fall

SHANGHAI/HONG KONG, May 22 (Reuters) - China announced a

major crackdown on cross-border investment on Friday and said it

would punish brokers it accused of illegally moving money to

foreign markets, sending their shares plunging.

Online brokers Tiger, Futu and Longbridge would be penalised

for soliciting business in China without an onshore licence, the

securities regulator said. Shares in Futu and Tiger parent UP

Fintech Holding fell more than 30% in U.S. premarket trade.

The move intensifies scrutiny of capital outflows - which

are strictly controlled by China - and also sent shares of

popular Chinese companies listed abroad lower because the

brokers' clients will be limited to selling shares, not buying.

The China Securities Regulatory Commission, which launched

the crackdown with seven other government agencies including the

central bank, said in a statement it was targeting overseas

firms and their local partners operating without approval.

It said illegal gains would be forfeited.

Futu said it had high compliance standards, had previously

stopped adding accounts for mainland applicants and rejected

tens of thousands of applications that did not meet

requirements. At the end of the first quarter, mainland

investors accounted for 13% of its customer base.

The firm disclosed later in a filing that it faced a 1.85

billion yuan ($271 million) proposed penalty from the CSRC.

A Tiger spokesperson said the company "has always placed

compliance as a top priority". It noted the CSRC statement, said

it would cooperate and "all business operations remain normal."

Its parent, UP Fintech, said the CSRC Beijing

bureau had imposed administrative penalties of 308.1 million

yuan and confiscation of illegal income of 103.1 million yuan

over illegal activities by its subsidiaries, a filing showed.

Longbridge did not disclose details of the penalties it

faced, but said it would strictly implement the rectification

measures in full accordance with regulatory requirements, while

emphasizing that the safety of client funds remains unaffected.

"The government wants to ensure that any outbound capital

flows are under its scrutiny," said Gary Ng, senior economist

for Asia Pacific at Natixis.

NO NEW INVESTMENTS ALLOWED DURING TWO-YEAR WIND-DOWN

The firms would be given a two-year grace period to wind

down illegal activities, the regulator said, during which time

customers would only be allowed to sell existing holdings and

withdraw funds, with no new investments allowed.

U.S.-listed shares of Chinese companies popular with

investors fell sharply in pre-market trade with online

marketplace operators PDD Holdings ( PDD ), Alibaba ( BABA ) and

JD.com down between 3.5% and 6%. KraneShares ETF of China

internet companies fell 4.3%.

The regulators' announcement came after markets closed on

the mainland and in Hong Kong on Friday. Hang Seng futures

fell 1.5%.

"In the short term, these actions may cool down some trading

and speculative activities in Hong Kong," said Steven Leung,

director of institutional sales for UOB-Kay Hian in Hong Kong.

PENALTIES 'APPEAR RELATIVELY LENIENT FOR NOW'

Friday's crackdown widens years of scrutiny, which stepped

up late in 2022 when the CSRC banned overseas institutions from

opening accounts for mainland investors.

It coincided with a crackdown on speculation in onshore

markets and was aimed, regulators said, at protecting "healthy

development of the capital market, channel outbound investments

via legal channels, and protect investors."

In Hong Kong, where most of the accounts in question are

located, the financial hub's Securities and Futures Commission

also said Friday it discovered "significant deficiencies" after

conducting a review of 12 brokers.

Hong Kong's SFC said it will require brokers to close

accounts opened with questionable or forged documents and make

stricter checks for new accounts and their funding sources.

The city's capital markets are booming and it claimed top

spot globally in the first quarter after companies raised

HK$109.9 billion ($14.03 billion), according to KPMG.

Share sales to retail clients constitute a sizable portion

of brokers' revenue, with Futu and Tiger acting as underwriters

of stock offerings for more than 80 and 45 listings since the

start of 2025, exchange filings showed.

"The penalties appear relatively lenient for now, though we

cannot rule out the possibility of larger fines down the road -

or even criminal prosecution," said Zhan Kai, a partner at law

firm Dacheng in Shanghai.

($1 = $1.0000)

($1 = 7.8356 Hong Kong dollars)