Overview of the Chinese forex market

China has a relatively long history in forex compared to many developing markets and regions, especially when considering the mighty BRIC nations.

China has a relatively long history in forex compared to many developing markets and regions, especially when considering the mighty BRIC nations. However, the regulators have not made the exact regulations clear on the status of margin FX as a tradable asset class for retail and institutional investors. Nonetheless, the sheer size of China means brokers from far and wide have been attracted to this booming market.

China overtook Japan to be the world’s second-largest economy by GDP. The general economy and fundamentals have been pushing the nation to economic glory. New cash for the public means new investment opportunities; China’s vibrant financial markets have been entertaining the new riches, however foreign markets have been on the traders’ eyes.

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China has two developed stock exchanges (Shanghai and Shenzhen) with over 1,600 listed companies between them. Shanghai Stock exchange is the world’s 5th largest in terms of volumes. Chinese retail investors have been the key drivers of activity in the equities markets. Retail investors make up the majority of trade participation with nearly 70% of volume falling in the hands of the smaller investors.

Growth in commodity derivatives has been tenfold as the country is one of the leaders in supplying and using commodities. Turnover of China’s three commodity futures exchanges in Shanghai, Zhengzhou and Dalian was around $19 trillion in 2009, the world’s biggest commodity futures market, with average daily turnover of around 500 billion Yuan.

Forex trading first started in China as people were increasing their internet usage and looking for investment opportunities with low capital entry levels and high growth returns; although the stock market has been bullish throughout the last six years, in China trading hours and liquidity haven’t been attractive.

Hong Kong-based brokers were the first to penetrate the market with local representative offices opening up in Shanghai. The office would complete the full account opening and trade life cycle for the client.

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Foreign brokers caught on to the large opportunities China offers; FXCM set up a regulated entity in Hong Kong as margin trade rules were not clear under the China Banking Regulatory Commission (CBRC). UK-based CMC Markets followed FXCM by getting authorized by the CRBC to offer “non-business” related services to mainland China residents. CMC Markets already had an established client base trading FX, stock indices and major commodities via its London head office.

The trend continued and more overseas brokers set up shop.

China has been hosting numerous finance and investment related expos, including Forex Expo and World Money Show China which were directly FX and derivatives based. Turnout in the expos is around 5,000 to 10,000. General financial and investment shows are crowd pleasers and The 6th Guangzhou International Investment & Financing Expo and the 2011 (Shanghai) the 5th Venture Investment and Franchise Exhibition has been popular among the trading community.

In addition to brokers, software vendors or resellers of platforms including Metaquotes and Vertex FX (from Hybrid Solutions) are active. Chinese-origin brokers who are acting as market makers have been increasing with the likes of Bracera and 121 Finance Group having a strong local base. Other noteworthy Chinese origin brokers include Hantec (Australia/ UK), City Credit Capital (UK) and HenYep Markets.

China has recently allowed local futures brokers to trade in global futures contracts; these are positive signs for local arbitragers and hedgers especially as volatility is high in gold and oil. Forex as an asset class will continue to gain attraction from investors. The next phase of liberalization will be eagerly awaited by the market at large.

More detailed information is found in the Forex Magnates Q4 2011 Report.

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