China: NOT the next Forex destination

  Couple of weeks ago I covered the developing Dubai Forex scene with several large brokers (FXCM and GFT) operating

 

Couple of weeks ago I covered the developing Dubai Forex scene with several large brokers (FXCM and GFT) operating regional offices on the ground. I argued that Dubai (UAE) and the Middle East in whole is a lucrative destination for the always avid brokers for three reasons:

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  1. Few Forex brokers
  2. Relatively booming economy (oil prices etc)
  3. Legal substitute to gambling

Last week  Saxo announced its plans to set up shop in Dubai as well.

This week I’d like to discuss the Far East Forex potential.

Japan: Land of the rising Dollar

GFT, Saxo, FXCM and Gain all maintain local presence in Japan. Saxo for instance claims 11 white labels in Japan alone which are responsible for over 80% of its Far East volume. FXCM has a local partner oddly called GCI just like another GCI Forex firm, based in Panama and probably unrelated. And Gain recently acquired one of its Japanese white labels.

China: no Forex trader’s land

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I’m not really aware of Korean, Thai or other brands but what is considered the most emerging and attractive destination for those looking to make quick profit is China.

A little headline that hit the financial press couple of weeks ago was this piece by Thomson Reuters: http://www.forbes.com/feeds/afx/2009/05/05/afx6376661.html describing that the Chinese government intends to strengthen its regulation over ‘speculative’ foreign exchange accounts by basically eliminating any option to deposit or withdraw without a regulatory approval. End of game.

Following the slow shift from a communist economy to a semi-capitalistic economy, this enormous country is experiencing a tremendous boom unlike any other. With GDP growing even during the current recession there are endless opportunities for foreign investors to invest their money and knowledge in local businesses and exploit large numbers of opportunities that are out there.

It would only make sense to offer the local population, whose middle class is growing rapidly both in numbers and in assets, a variety of financial instruments with Forex trading being one of them. Several factors however will make it difficult or even impossible in the coming years:

  1. Stringent regulatory, or even lack of regulatory, environment
  2. Government is very hesitant and careful in its foreign investments policy and openness is not one of its traits
  3. Relative ignorance regarding usage of financial instruments (which to some brokers is a big advantage)
  4. Yuan (remnibi) is pegged to USD or at least floats in a band, making betting on the move relatively unattractive
  5. Inability to transfer funds out of the country, which is probably the biggest hurdle brokers and others deal with. Even if the customer has a credit card or bank account they are unable to deposit their funds in foreign accounts or the foreign account holders are unable to transfer these funds into their own offshore accounts.

So for the time being looks like the only Far East potential is Japan and maybe S. Korea.

If not China itself, Hong Kong then?

Establishing a Hong Kong office does make sense in order to prepare for a future invasion into China once gates are open. While Hong Kong was annexed returned to China when British lease was over, it is still treated differently than mainland China by Chinese officials. For instance you can invest in Chinese shares through HK’s stock market while you are unable to directly invest in the Shanghai market.

So, if different rules apply and the proximity is optimal, why not try Hong Kong? 

Michael

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