Many brokerages realize that success in China is imperative to the success and longevity of their businesses, however is the true potential really apparent to western firms?
Today, LeapRate’s Andrew Saks-McLeod met with one of the numerous introducing brokers (IB) which refers its business to various brokerages and offers a managed account service to clients across China.
Visiting the offices of the Golden Investment Corporation in Shijiazhuang, which is a town in the Hebei province of China, Mr. Saks-McLeod met the demure, polite and subdued Mr. Lee, CEO of an IB company with a value of over $150 million.
Everything in China is big. Over the last 10 years, the sheer scale and speed of development is other worldly, with high quality and rapid expansion of towns and their businesses beyond the cognitive capabilities of any other nation on earth.
Shijiazhuang is considered a small town, and although the capital of the Hebei province, is not well known to Chinese people in other regions of this vast country, let alone firms abroad.
The description of small is a matter of opinion, however, as Shijiazhuang has an urban population of 10.1 million, in an area that has been built up in just five years.
From agricultural town to investment hotspot in just 5 years.
Shanghai may be the darling of the western tourist or business visitor, however there are vast expanses of China which are wealthy, highly sophisticated and will, if approached properly, bring huge amounts of business to western brokerages.
Shijiazhuang is just one of literally thousands of towns in China which have transformed from agrarian backwaters to centers of enormous wealth within a five year period.
The construction of the expanse of apartment buildings and offices which serve the city’s 10.1 million population have been funded by wealthy private investors with an averege cost of $20 million per project, all in cash, with no financing whatsoever.
Chinese investors are cash-rich, have no debts and pay no taxes.
View from within
Mr. Lee explained to LeapRate how his company began and its ethos.
“This particular arm of my business empire which concentrates solely on FX was founded in 2013, however my experience goes way back” he said.
“Ever since elementay school, I was interested in fluctatiations in prices between different assets, and therefore I began investing in agricultural products, over 20 years ago.”
“When this firm that you see today first started is business as an IB in 2008, we were offering a variety of stocks, futures, options and eventually moved into precious metals and FX as an IB and money manager” explained Mr. Lee.
“The vast majority of business in this company is managed accounts.”
Golden Investment Corporation’s headquarters are palatial offices which consist of a trading room and several meeting areas which high net worth clients can visit, in order to receive personal service relating to their portfolios.
Luxury and modernity abound, clients are treated to a fine dining experience where business can be discussed over lunch around a table made from a whole, hand finished oak tree root within the company’s premises, and are chauffeured to and from their next meetings in a brand new luxury car.
This is a far cry from the quick-buck impression of China’s IB businesses that is often envisaged from outside of China.
“Our clients are from all over China” explained Mr. Lee. “We have many in large, sophisticated cities such as Shenzhen, Beijing, and Shanghai, along with several in many smaller towns in various provinces, and currently there are $50 million in assets under management in managed FX accounts, plus much more if you include our direct retail traders.”
This emphasizes the requirement for localization in China. For brokers wishing to establish relationships with IBs that will bring big-ticket, long term client business, being on the inside, with the right partner is paramount.
It is clear that calling Chinese IBs byq telephone from overseas, attempting to obtain business from a nation in which non-Chinese internet sites are blocked, Visa and Mastercard are blocked, nobody speaks any languages except for Chinese, and the entire business culture differs substantially from that of anywhere else in the world, is a futile exercise to the point of the maximum effort resulting in simply scratching the surface of a vast IB network with huge potential.
Mr. Lee’s company has 100 staff, and provides in house money management. Bearing in mind the need for client trust and continual relationships required by Chinese clients, along with the rising cost and ineffectiveness of digital marketing in Western markets, brokers fostering this kind of relationship is a far more effective way to gain a constant flow of volume.
LeapRate asked Mr. Lee what he looks for in a brokerage or liquidity provider with which to partner to provide brokerage and trading facilities.
“Regulation is of utmost importance, which is why overseas firms are preferable, however execution and trading environment is another consideration but we are more concerned with customer service and efficiency because we have vast order flow being processed by professional traders, therefore need it to function with minimal support” explained Mr. Lee.
Dispelling the Chinese IB commission myth
Mr. Lee then completely debunked a widely held myth that Chinese IBs are interested in hiking spreads up to higher than market prices in order to pay sub IBs, or to split deposits operated on a profit/loss model.
He explained that it more important to have low spread and market prices, and very low commissions and fast, honest and correct execution. From Mr. Lee’s perspective, it is far better to operate in this manner and then reinvest the profits from proprietary trading into the company, therefore giving managed account customers a very good service and long term profit.
“Our company makes money by trading, not by commsision or rebates. The development of business is done purely by trading and generating revenues from profit on our own account, which can be reinvested into the company and used to generate more business and remunerate sub-IBs.
Where is China going from here?
It is very clear that China is highly developed and the investing population are extremely enthusiastic about generating wealth. Therefore, it is essential to gain the perspective of a professional as to what will be the next advancement.
“In China, the FX industry is still unregulated” he explained. The government allows the trading of FX very freely, but does not allow promotion. Once the government implements a full structure for FX market participants to operate in China and promote their business publicly, then it will accelerate exponentially.”
If this happens, which is very likely, given the industrious nature of China’s population and willingness in vast numbers to create enormous wealth which is beyond the realms
Finally, should the regulatory structure be invoked, it is important to consider whether Chinese companies will quickly spring up and provide entire end to end liquidity, platform and infrastructure firms of their own, the way they have done in the automotive, engineering and electronics sector.
Mr. Lee remains very optimistic for Chinese partnerships with Western firms as well as future partnerships with Chinese companies should they establish in China.
“It doesn’t matter if they make it all domestic” said Mr. Lee. As ong as it is regulated and has a good environment and infrastrucutre, then there should be enough demand from China to provide business to all western firms and potential domestic ones.”
LeapRate is currently investigating the Chinese FX market infrastructure from IBs and large investors, to Chinese companies preparing for IPOs on western venues. Follow us for full, in depth coverage from across China.
Photograph: Andrew Saks-McLeod discusses the Chinese IB industry with Mr. Lee, CEO of Golden Investment Corporation in Shijiazhuang, China.