Forex Trading in China
China,
does not have a free market economy, hence remains an unusual place to
start a business. As a result, the political structure is closely tied
to economic growth. The communist government in China, in one way
suppresses development, but also fosters, and sponsors the growth of
Chinese industry, and its expansion overseas. This in turn protects
domestic industries, which gives it an edge as a nation over the others
in the BRIC category.
A persistent
difficulty for Forex brokerages is that China is more or less
impermeable to western companies as the entire business methodology in
China is in stark contrast to other global models. Strict restrictions
on non-domestic companies operating for forex trading China, seizing
financial assets of companies participating in JV’s with Chinese
organizations, and blocking bank accounts of foreign companies operating
in Chinese territory, makes it a hindrance for growth, sometimes.
The
Chinese government, and regulators view forex as a highly leveraged
product which carries too much exposure. Specifically, in China, when we
look at the huge population, huge losses in savings can end up in a
crisis that would shake social stability. Chinese people have that
inherent risk-taking attitude in their blood, and also have a lot of
savings, due to lack of social welfare. Hence, the risk of losing out
precious money, in lieu of forex trading, is very real, and dangerous.
The
government, however, also considers forex as a more “fair game”. With
the huge market, clients can become better off without market
manipulators, but opening up to OTC is a huge step for them, both in
forex and in futures.
A recent trend shows that more companies are trading goods and services with China, and pricingit
in yuan instead of dollars. The fourth quarter of 2013 saw a 30%
increase in yuan trade settlements, up from the second third quarter.
Although the currency remains tightly controlled, the Chinese government
and many fund managers are betting on the yuan becoming the new yen in
Asia. According to the Bank, dollar activity in the 4th increased by just 2%, while euro,pound and yen trade, all declined.
Last
year, China’s merchandise trade exceeded $4 trillion, making it the
world’s No 1 trading country. Total cross-border yuan settlement was
5.16 trillion yuan, up 61% year on year.
Current Foreign Exchange Institutions:
China’s Forex market is comprised of 2 parts. The inter-bank or wholesale market and the retail market.
Major parties involved in the forex market are:
1)
CFETS which functions as a trading platform for inter bank markets, and
is responsible for clearing the market and for providing the
supervisory authorities with market information
2) PBOC and SAFE as regulatory authorities
3)
Designated FX banks and non-banking financial institutions and
non-financial enterprises authorized by SAFE to engage in foreign
exchange business
4) The enterprises that can earn and spend Forex.
5) Individuals who have forex trading needs.
China’s
FX market is limited in product scope mainly to spot trading in US
dollars. For a long time since its establishment, the inter-bank market
offered spot transactions only until August 2005 when inter-bank
forward and swap were introduced.
The two factors that most
seriously constrain development of China’s FX market are the compulsory
FX settlement system and the rigid exchange rate regime. Specifically
the rigidity in exchange rate imposes limits on the growth and diversity
of the FX market. But at the same time, allowing more flexibility in
the exchange rate requires a broader, more diversified, competitive and
efficient market platform on which the forces of supply and demand can
determine the RMB value of foreign currency.
Development of the FX market provides the needed foundation for any move toward greater exchange rate flexibility.
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