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Screenshot of a breaking news alert e-mail from Q2 2017
China’s longstanding fascination with all things Western, from Liverpool’s youthful boy band of the 1960s, The Beatles, to somewhat garish parodies of Western electronic goods and a business culture which requires executives to wear intrinsically European suits, resembling Jermyn Street’s finest, has now begun to take a 180 degree turn.
In the same way that the lyrics of Penny Lane are a distant memory to most of us, and an absolute mystery to our children, whereas they captured the minds and spirits of our forebears worldwide, so follows Western industry, whose place is now rapidly being filled by the exact nation that once looked on in awe at the ingenuity of the West: China.
The once-fashionable Liverpool street which featured in the aforementioned song which China’s youth held in high esteem is now a derelict, uninhabited shadow of its former self, with homes, factories and shops decaying.
It is indeed apparent who holds the industrial trump card these days, however it is not just heavy industry or emulation of western products that has outlined China as an economic and industrial powerhouse. It is also its burgeoning middle class, which consists of educated, astute and worldly young people, all of whom are not afraid of risk, and are enthusiastic and willing to invest in Western financial markets despite the strict capital control laws and disdain that the Chinese communist government shows toward free market firms which dare to solicit business from its own populace.
Nowadays, the retail FX industry has become so focused toward China that many companies can attribute more than a third of their monthly volume figures to Chinese traders, which are recruited to firms via sharp and active introducing brokers in mainland China.
Payment processing companies with clever algorithms have sprung up in significant numbers, providing FX firms with a reliable, risk managed method of accepting payment from behind the metaphorical iron wall that keeps China’s population from the temptations of the free market.
Chinese traders are high volume, high activity go-getters with a yearning to gain tremendous wealth, and are not afraid of taking calculated risks, which is a stark contrast to the West’s fewer numbers, declining youth population and a jaded investing public which is very conservative and still recoiling from the 2008 global financial crisis which left many nervous about any speculation on any financial market.
This fascination with China by western companies is partly punctuated by the fact that the FX industry in China itself is under developed, and that Chinese traders prefer Australian, British, Cypriot or European companies in which to invest, as they associate western business ethic with quality, integrity and, an increasingly important matter among the Chinese bourgeoisie – status.
Why is this a subject for consideration? Indeed, companies are carrying on just fine, and have been doing so for at least two years, attracting business via Chinese introducers and making a good return.
Herein lies the potential pitfall: China’s law relating to companies which do business abroad insists that if a firm enters a joint venture or partnership (foreign ownership of Chinese companies is prohibited, as is establishing foreign -owned branches of Western firms in China), then the Chinese partner must be selected and approved, and must be fully owned by the Chinese government, employing Chinese staff.
Once this is in place, certain restricted ventures can be conducted with oversees firms, but the transfer of Chinese funds overseas remains illegal. Of course, once a trader deposits funds into a broker’s client account outside China, the domestic government has no jurisdiction over it, thus the government does everything it can to mitigate this.
China employs over 1 million government officials, some of whom use high technology to conduct surveillance on the population to ensure that they are adhering to the communist ethos of not conducting business abroad. There is no doubt that China’s government is fully aware of these remarkable and highly popular methods by which Chinese traders do business with FX firms abroad.
Will they free it up? Very unlikely.
Such a lucrative business will not bypass the eyes of the Chinese government, which is successful in building economic empires across the world, buying up western companies such as Volvo, and Jaguar Cars, both of which are premium manufacturers, one based in Sweden, the other in Britain, and are making some of the finest cars available on today’s market.
They may be Swedish or British by location and the design team and engineers are Swedish and British, but they are Chinese companies.
No longer is the phrase ‘Made in China’, but rather ‘Made by China.’
FX companies can ill afford to be subjected to any potentially draconian government policy that puts a stop to any business being conducted between Chinese clients and Western FX firms once and for all, so if that should happen, what is the solution?
There has been absolutely no evidence that any change to the current structure is on the cards, however for companies to be issued with an instruction to immediately desist from Chinese activity would result in a 30% loss in customers for some companies, and an 80% for others, leaving them very much open to takeover by an aligned entity – and there is only one aligned entity: the Chinese government.
Could the future be one in which Western companies become Chinese companies located in Western nations with Western senior management, perfectly aligning with the requirements of the industrious Chinese government, yet retaining the highly attractive Western reputation for high quality and integrity, effectively becoming the FX industry equivalent of Volvo or Jaguar Cars.