China holds tons of potential for the forex industry, and yet it has remained virtually untapped. In fact, not a single forex firm has been able to penetrate the Chinese market.
Sure, larger brokers such as FXCM, Oanda, and CMC Markets have been able to establish themselves in the Far East, but their operations have been mostly based in financial hubs such as Hong Kong and Singapore, rather than mainland China itself.
But all of that may change soon enough because China’s forex regulator, the State Administration of Foreign Exchange (SAFE), just announced some new measures that should open up the country to foreign investors.
SAFE wants to simplify the process of transacting with foreign investors – from registering and opening capital accounts to paying with foreign currencies. It plans to do so by scrapping a total of 24 clauses in its forex regulation rules, which should make it easier for foreign direct investment to flow into the country.
It also plans to implement new guidelines that will allow companies to move their funds in and out of the country with just a one-off approval from SAFE, rather than having each transaction individually approved.
One of its programs will allow firms to practice “cross border netting.” In layman’s terms, this just means that firms within China that transact with firms outside the country can settle their transactions on a net basis, rather than paying and receiving funds on two separate transactions. I also heard that there are plans to allow companies to share bank accounts and make payments and receive funds on behalf of other units.
The obvious upside to this new, more lenient regulation is that it could boost market liquidity. Those who previously did not have access to the market in the region could now trade forex.
It’s not all good in the hood though. There are naysayers who think that China’s move to ease financial controls in the country can do more harm than good.
According to Forex Magnates, there has already been an instance in the past when foreign brokers tried to gain access to the Chinese market. CMC Markets partnered up with a commercial bank in the country, Min Sheng, and offered retail forex trading.
In 2008, Min Sheng Bank launched a platform which allowed clients to trade with a 1:30 leverage and grew by about 3,000 clients monthly. Operations didn’t last long though. The government soon shut down the bank in June after a complaint was filed, saying that the business was a threat to public financial stability.
Some market junkies are worried that we could see a repeat of what happened in 2008 with the pseudo-joint venture of CMC Markets and Min Sheng Bank. Without any established standards in regulating the forex market in place yet, some forex brokers could end up taking losses or even closing shop.
What do you think? Will the soon-to-be-implemented regulations in China be beneficial or harmful to the forex industry?