As we have reported yesterday, pressure on companies operating in China is increasing once more. Over the past several years, we have observed a cyclical approach on part of local authorities when it comes to vigilant over the operations of brokers in the country.
Every year or two we see a ramp-up in pressure and subsequently forget about it, while business in China remains “as normal”. Over the past couple of months, several locally-registered firms associated with brokers have been pressured by the State Administration of Foreign Exchange (SAFE) and the People’s Bank of China (PBoC).
Both government entities are chiefly responsible for enforcing the capital control rules in China and as such have significant powers.
Getting Money Out of China
Over the past couple of years, the main issue in the Chinese market has not been how to onboard clients or where to find the next talented IB. Instead, brokerage companies have had to find creative ways to get their money outside of the country.
While some solutions have been available, the government is actively closing loopholes which were previously available. In the process, it is identifying where the transactions are coming from and applying pressure on WFOEs (Wholly Foreign-Owned Enterprises) to stop violating capital control laws.
With the global picture taken into account, the pressure on foreign companies in China is not likely to subside anytime soon, especially after the latest batch of escalations from Donald Trump.
The real trade war began 30 years ago, and we lost. This is a bright new Age, the Age of Enlightenment. We don’t lose anymore! https://t.co/5ECmBpsI6D
— Donald J. Trump (@realDonaldTrump) May 25, 2019
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Chinese Yuan Devaluation Risks
After a decade of consistent appreciation of the Chinese yuan, in 2014 the currency topped out and has been trading in a range since. With the US reviewing China as a prospective currency manipulator every year, the country’s leadership has so far been able to manage the exchange rate at relatively stable levels between 6.30 and 6.97 CNY per US dollar.
The ongoing trade wars escalation, however, could pressure the government into taking every possible step to prevent the flight of foreign currency outside of China. Any capital flight away from the country will be resulting in a shortage of US dollars and in turn a weaker yuan – something that could send any US trade deal negotiations into a tailspin.
While forex and CFDs trading in China is a gray area, the SAFE and the PBoC have found a way to pressure the industry into submission by waving a red flag at them funneling money out of the country.
Kyle Bass, a US hedge fund manager has called out the Chinese government with his public comments on shorting the yuan. Earlier this month however he announced that he exited his position and refocused his attention on the Hong Kong dollar peg.
Almost Business As Usual
In the end, after several years of cat and mouse games between brokers and regulators in China, many FX brokers are continuing to operate in the country. Despite the challenges instituted by local authorities, firms are continuing to get attractive by a lucrative client base.
With the complex business relationships with local IBs and a challenging setup to shift money outside of the country, the business is difficult but is simply too lucrative to let go. Since many brokers operating in China are Australia-based, the Chinese government took the drastic step to address its challenge by applying pressure on foreign regulators.
Whether or not Australian brokers manage to fight back successfully against this clearly politicized push, remains to be seen. For the time being, companies in the land down under have taken coordinated steps to reproach the ASIC’s efforts to pressure firms to reject clients from overseas, and in particular, China.