A Hong Kong-based foreign exchange (FX) broker appears to have become the first company to receive a Forex License from the Chinese government on Monday. According to the Chinese Forex Trading Center, Guo Tai Jun will be allowed to enter the interbank FX trading market and broker deals for “spot FX, futures and swap currency trading operations.”
Prior to this, individuals that wanted to trade with Guo Tai Jun would have to have a bank account in Hong Kong and hold HKD in that account. Now people in mainland China will be able to trade with the company.
Chinese Forex Trading Center said that the firm would be offering its traders access to the market via the ubiquitous MetaTrader 4 platform. As with the rest of the world, bar Japan, MetaTrader 4 is a popular trading platform in China.
Whether Guo Tai Jun’s service will actually be taken up by Chinese traders is less clear. In line with the Chinese government diktats, the firm is only offering 20:1 leverage.
Guo Tai Jun – Leverage Too Low?
As such, it may be difficult for the broker to compete with its offshore competitors who continue to offer much higher leverage. Caps on leverage in Russia and Europe have had the effect of pushing clients to trade with offshore brokers that provide the leverage they want. Even taking into account any nuances that exist within China, its difficult to see why traders in the country wouldn’t behave in the same way.
Nonetheless, and on a more macro level, that Chinese authorities have given a broker a regulatory license is significant for the retail industry. Quite how this even happened is unclear. Speaking to Finance Magnates, China specialist Pavel Khizhnyak – the founder of Trade Exact Consulting – noted that there is no obvious path to obtaining a license from authorities.
“To my knowledge, there is no clear application process for such a license,” said Khizhnyak. “Each applicant must find its own way to the regulator and each application is reviewed on a case by case basis.”
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More surprising is the fact that the license was given amidst a turbulent period of time for brokers in China. In the past twelve months, brokers operating in the world’s second-largest economy have been experiencing an array of problems, notably with payments service providers and marketing bans. But for Khizhnyak, there are a few reasons not to get too worked up about the license.
“The license scope is mostly focused on interbank transactions,” said Khizhnyak, “so it does not necessarily mean that we should be overly optimistic about the prospects of more licenses for retail brokers. This is also similar to news that circulated four years ago regarding Guo Tai Jun. They received approval for offering fixed income, currency and commodity trading services, but it didn’t change anything for the local margin FX trading space.”
Things have, however, changed in the past decade. In the past couple of months, China has taken some steps that indicate it is trying to – at least superficially – open liberalize its economy to meet some of the standards put forth by the World Trade Organisation. Most notably, local authorities recently gave Standard Chartered, a British bank, a license to hold Chinese citizens assets. This was the first time such a license had ever been given to a foreign company.
Is that indicative of wider change that Guo Tai Jun’s license is a part of? Perhaps, but in the Wild West of China, it’s always hard to say.