How to enter China is a hot topic within the boardrooms of most Western forex companies, and yet in spite of the enormous potential, it remains isolated due to the strict communist government’s adversity to foreign companies conducting business from within China and prohibitive restrictions imposed.
Whilst the majority of forex companies have concentrated significant effort toward garnering a Chinese client base via local representatives, IBs and offices situated in other Asia-Pacific countries, not one has managed to establish within the country itself to this day.
There is a glimmer of hope that this situation may change as a result of the Chinese foreign exchange regulator, the State Administration of Foreign Exchange (SAFE) has recently announced that it has put in place guidelines to simplify regulations on foreign exchange management to create a more convenient investment environment for foreign investors.
On implementing this guideline, the regulator intends to integrate and simplify the process of registering, opening account, utilizing and payment of capital with foreign exchange. Additionally, the guideline further clarifies forex management for foreign investors and abolishes some normative documents fettering foreign direct investment.
According to SAFE, a total of 24 clauses of forex regulation will be abolished, potentially good news for forex market participants in their quest to enter China. Although aimed at easing the exchange rules for influx of foreign investment, Chinese traders could leverage this to facilitate easier methods of trading with foreign brokers.
A Less Draconian Future?
Although some of the largest forex companies including FXCM, CMC Markets and OANDA, have a significant presence in the Far East and a not inconsiderable book of Chinese clients, all of them are based in ‘satellite’ states such as Singapore and Hong Kong.
This exemplifies the difficulty of legally circumnavigating the prohibitions on establishing in China. No doubt the new rulings could increase the volumes in renminbi currency pairs that are offered by FXCM and OANDA, and provide their Asian operations with an influx of new traders without the companies having to use Chinese representative offices at all.
Alpari is one particular company which experienced a boom in business from China after extending its business into China via a regional partner. Again, a pseudo-joint venture in an attempt to circumnavigate the Chinese government’s ban on joint ventures or partnerships with overseas companies. At the time, Karl Yin was CRO of the representative office which provided clients to Alpari.
Mr. Yin explained to Forex Magnates: “Historically, there were actual deals in place aimed at trying to penetrate China by establishing joint venture broker deals with Chinese commercial banks. Two classic examples would be the deal between Min Sheng Bank and CMC Markets, and Hua Xia Bank with ODL Market. Min Sheng Bank started to offer retail clients a marginal forex trading platform with 1:30 leverage which was launched in March 2008, with which roughly 3000 accounts were acquired per month, but it was shut down by the Chinese authorities in June 2008. This is the closest attempt at establishing margin forex trading in China.”
Close examination of the government’s response revealed that the shutdown was a result of a complaint and Chinese government treats public stability very seriously. When members of the public are exposed to financial loss, regardless of whether it was the fault of the broker or not, the government will treat it as a potential group event and try to establish a “balance”. ODL’s deal was called off immediately after the closure of Min Sheng Bank.
The combination of this jackboot approach by the authorities and lack of standardized forex trading infrastructure within China further compounds the Chinese traders’ wish to select overseas MetaTrader or Currenex-based companies with which to trade.
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Given the previously harsh line taken by the Chinese authorities, the new rulings could be the start of an easing process, therefore a significant boon to the global forex industry.
Potential Exodus of Forex Funds
The major consideration here is control and financial stability. Let’s take another example, trading platforms. Trading platforms in China are a very long way behind those of the developed world, and no one is using foreign trading technology such as MetaTrader or Currenex which is also due to financial security as China’s government concerns itself with a very inward-looking approach to social stability.
The laws will also apply to foreign exchange for the purposes of making purchases. If a resident of China has to pay an overseas institution an amount of less than $50,000 for services rendered, they will be allowed to purchase foreign exchange for the purpose after presenting the relevant contract or invoice.
This includes online payments and e-commerce as well. Even in cases when the law has doesn’t explicitly require documents to be approved by SAFE, sale or payment of foreign exchange for services is still subject to examination and approval from the foreign exchange bank, if the sum in question is less than $100,000. If it’s higher, it needs to be approved by the local foreign exchange bureau.
SAFE’s official line on this was highlighted in its public statement on the proposal, where it stated that the intention is to make “foreign exchange management regulations more concise, standardized and systematic”.
Could Twilight Be Falling on Rep Offices?
Representative offices are ubiquitous in China, as they are the only means by which most overseas brokers have managed to successfully gain a foothold in the country. These used to be overseen by the China Banking Regulatory Commission (CRBC), which ceased to offer representative office licenses in 2005. Prior to this only a very small number of brokers, two of which were Saxo Bank and CMC Markets, were issued the license.
Mr. Yin clarified this further: “Currently there are 2 types of representative offices in China available for foreign forex brokers: the first being a representative office issued by the CBRC and the second being a representative office issued by AIC (Administration of Industry & Commerce). Both representative offices have strict operation scopes, sales activity is strictly prohibited. Operators of both type of office are only be allowed to engage in communication, research and marketing.
“The only difference between CBRC representative office and AIC representative office is that they fall under different jurisdictions and different law enforcement, whereby if there is violation of the law, AIC rep office can be questioned by many authorities, but CBRC rep offices will only answer to CBRC”, he concluded.
Mr Yin also is of the opinion that CBRC representative offices are more protected, but also he questions how far this advantage can really be stretched, its only a theory as no practical example has yet been shown.
This easing of foreign exchange may negate the need to use such bureaucratic procedures at all, and could result in traders simply placing their funds with their broker of choice without any need to establish relationships with a representative office at all. If this happens, it could signal a very straightforward means for Chinese investors to divest their money from China – as happened in the former Soviet Union following the collapse of the socialist regime.
Forex Magnates has conducted extensive research relating to China, and offers a full report which can be obtained here.