LeapRate Interview: Legal overview of the Chinese FX market

Following this year’s exciting developments in the Chinese FX Market, and the forthcoming FXIC in Shanghai to be hosted next week by Shift Forex in conjunction with FXShell, LeapRate has sought expert insight in the form of Advocate and Notary Tal Itzhak Ron of Tal Ron, Drihem & Co., one of the most influential lawyers in the online capital markets and financial technology industries worldwide, along with offshore specialist Kovi Skier, a colleague from his firm.

It’s been a busy month for Tal, with major conferences being held in London, Berlin, Malta, Barcelona and Riga in the last few weeks alone, however he provided a vital few minutes to share with us his insights on the booming Chinese market.

So tell us, Tal, Kovi, why are FX and binary options brokers turning to China today? What attracts brokers to the Chinese market?

Brokers are noticing China more and more because China is the future. It is the largest and, arguably, most rapidly growing trading market in the world. The Yuan seems positioned to become the new Yen in the coming years, according to financial and banking experts. The question facing FX and Binary brokers today is not, should we enter the Chinese market – but how? Just how big is the market?

To give some perspective, China’s commercial trade passed $4 trillion last year. More than 5 trillion Yuan were traded in cross-border settlements. Both of these numbers were drastic increases from 2012. China was also the European Union’s biggest trading partner last year, with more than $500 billion worth of merchandise traded between the two.

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What makes China’s FX and Binary markets different than the European market?

The methodology and business culture of Chinese businesses is in stark contrast to those seen in Western markets. Because China is a Communist country, the government strictly regulates and interferes with forex trading in China through the Peoples Bank of China (or PBOC) and the State Administration of Foreign Exchange (or SAFE). This can make the Chinese market seem intimidating to foreign companies. The tight control the government keeps over the Yuan – which is pegged to the dollar – has also interfered with the growth of the industry in the past, but we may see this changing soon.

What recent developments have affected the Chinese currency market?

The Yuan has seen rapid growth in recent years, despite government restrictions on the exchange rate. The fourth quarter alone of 2013 saw a 30% increase in Yuan trade settlements, at a time when other currencies faltered. Chinese authorities must have noticed this, because in this year’s fourth quarter they approved, for the first time, direct trading of the Yuan against the Euro in China’s interbank currency market, making the Yuan more viable to foreign markets by lowering the trading cost.


What specific issues do foreign companies need to look out for when attempting to enter the Chinese market?

Brokers must remember to respect the Chinese market rules. Even though many brokers that cater to Asian markets abide by foreign regulations (eg CySec, FCA, ASIC), in China, failure to abide by the state’s “rules of the trade” can lead to drastic steps on the part of the Chinese government, including assets seizure and closure of bank accounts. China’s compulsory FX settlement system can also be difficult to work with.

The government works hard to protect citizens’ savings – but also sees the promise in expanding Forex trade. Another thing to look out for is China’s particular treatment of IP law – which differs dramatically from other parts of the world. In addition, conference-goers should be aware that in China, FX and Binary conferences are not just B2B, but also B2C. At the China Money Fair Conference earlier this year, some brokers were surprised to be confronted with angry customers. That’s another possibility to keep in mind.


What do you predict for the future of the Chinese market?

The Chinese market is in the midst of a snowball effect – as the market and national reserves continue to enjoy growth, the SAFE and PBOC are more and more comfortable relaxing restrictions, and as restrictions are relaxed, growth will only increase. It is our firm’s position that, although precautions must be taken, the Chinese market is ripe for new FX and Binary establishments. Careful adherence to government guidelines and ongoing legal counsel can ensure your company’s spot in the market of the future.

Photographs: Top left: Advocate Tal Itzhak Ron, Lower right: Kovi Skier

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