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Screenshot of a breaking news alert e-mail from Q2 2017
One of the most difficult challenges which faces the majority of FX firms wishing to attract clients from China is the stringent capital control restrictions which its government imposes on its population.
For this reason, complex algorithmic payment solutions systems have been developed over recent years in order to assist FX firms in attracting Chinese clients with the ability to offer them a means of depositing their funds into firms in free market nations.
China has remained steadfast in its restriction on the flow of currency outside its borders, despite the government being well aware of most FX traders wish to do business with companies abroad, and the resultant lack of a domestic retail FX industry, which if established correctly and regulated in a way that it could follow the agency model preferred by Chinese clients, would no doubt be a successful enterprise for Chinese businesses due to the sheer volume generated in the region.
Recently, however, it has emerged that Chinese officials have made a step toward easing the capital control rules, in order to make it easier for domestic companies and individuals to set up special purpose vehicles (SPVs) overseas, according to revised rules published by the nation’s foreign exchange regulator on Monday.
Under revised rules by the State Administration of Foreign Exchange (SAFE) that took effect on July 4, domestic investors in SPVs are allowed to keep profits and dividends made from such entities overseas.
Under previous legislation, individuals and companies which profited from overseas activities such as FX trading were duty bound to repatriate the funds within 180 days.
Whilst this allows Chinese investors to maintain profits generated from trading FX with overseas firms without having to withdraw and repatriate the funds, it serves by default to benefit firms in the free market which seek to onboard Chinese clients, rather than to create a method of establishing a retail FX industry in China.
It is widely known among representatives and introducing brokers in China which make referrals to FX brokers abroad that one of the main reasons which Chinese FX traders prefer firms in Australia, UK or Europe is because of the lack of developed FX companies in China, and the resultant tactics that the very few Chinese companies employ, which include operating from virtual offices, and internalizing all trades in order to keep the clients’ money and subsequently split the client losses between the referring agents and the brokerage.
Astute Chinese traders are well aware of this, to the great benefit of regulated Western brokerages.
Previously, SAFE had lifted a ban on loans made by domestic firms to their overseas SPVs, which were chiefly entities created for a specific, limited and normally temporary purpose, and simplified rules on the establishment of such entities, according to Reuters.
The revision of rules was aimed at supporting outbound investment by domestic firms and individuals and “improving (yuan) convertibility in cross-border capital and financial transaction in an orderly manner” according to the regulatory authority, however SAFE will monitor investment in SPVs and fund repatriation to crack down on fake transactions.
The regulator has in recent months cut red tape and relaxed foreign exchange controls, as part of gradual reforms to make the yuan fully convertible although no time frame has been set.
Many retail FX firms have added the offshore yuan (CNH) to their offering recently, which is a semi-liberal currency issued from Hong Kong. However, if China makes it easier for investors on the mainland to harbor profits abroad, it may be a matter of time before the mainland Chinese CNY becomes a staple currency.