The burgeoning and highly profitable retail FX business in China is completely relationship based. It is very unlikely that brokerages that understand China well will be remotely concerned about the recent internet marketing ban. Here is why it is business as usual.
Baidu, China’s major internet search engine which not only fills the void which is left by the blocking of Google and other major websites from free market countries, put a nationwide stop to the advertising of FX and binary options products to a retail audience in June this year.
The banning of advertising retail FX and binary options encompasses both direct marketing via digital advertising – notably banner advertisements placed by digital marketing departments that buy media in order to target a direct retail audience – as well as by affiliate marketers which do not have a relationship with the clients that they refer to FX and binary options firms outside China, instead have a website which advertises the services of various brokerages with which affiliate marketing agreements are in place.
China’s government has put a stop to the advertising of such products on a national basis, therefore invoking the website blocking abilities of what is often rather romantically dubbed the “Great Firewall”, which was implemented by the Communist Party of China in an attempt to regulate the internet in Mainland China.
It is the main instrument to achieve internet censorship in China, and the government regulations include criminalizing certain online speech and activities, blocking from view selected websites, and filtering key words out of searches initiated from computers located in Mainland China.
The firewall is the most sophisticated firewall in the entire world, and the government department which operates it, led by highly technologically literate Chinese president Xi Jinping employs over 2 million staff just to operte the internet infrastructure and its firewall across mainland China.
Today, whilst certain websites (including Google) are completely blocked, others can be freely accessed from China, however on a real-time basis, any politically or commercially sensitive website entries are censored on an immediate, real-time basis and are indeed subject to censorship by the Chinese government without the use of a secure connection.
This means that the ban on advertising for FX and binary options companies goes one step further than that of the recent bans on the advertising of retail derivatives in France, and the outright ban of offering services by electronic OTC derivatives firms in Belgium, largely because France and Belgium do not operate a closed domestic internet system, therefore infringers can be taken to court for violation, rather than blocked outright.
In short, the bans in France and Belgium can be circumvented by unregulated firms with offshore bases or binary options scammers (exactly the type of companies that caused this ban in the first place) and by the time the authorities have issued a cross-border court order, the companies could likely have upped sticks and run away with the money.
In China, this will not be possible as they will not be able to penetrate the firewall at all. Therefore such companies are as good as non-existent in the eyes of Chinese retail customers, especially bearing in mind that the government’s firewall will also flag any payments going to firms with names that are known to be overseas FX, binary and virtual currency firms and prevent the payment – Visa and Mastercard do not exist in China. China UnionPay does, and that is owned and operated by the government, thus the all-seeing-eye is omnipresent with regard to payment processing too.
Lots of hysteria, but does it really matter?
China is a very important market for many FX firms that have got this market right and understood how it works properly.
There are, even though retail traders, with their high deposit amounts and vast appetite for high volume trading have been high on the agenda for most retail firms for a number of years, only a handful of companies that can really claim any major establishment of large client bases in the People’s Republic.
FinanceFeeds conducted substantial research into this, among large introducing brokers and portfolio managers in Tier 2 development towns across China over a long period of time (attempting to find this information out remotely is impossible) and can deduce that the companies with large retail client bases in the mainland are FXCM, GAIN Capital. FXDD, Blackwell Global, Saxo Bank, GKFX, BMFN, and EXNESS.
Indeed, EXNESS garners the vast majority of its business from the mainland, as does BMFN. All eight of these companies have understood the way that the Chinese market works, it being very much a relationship-driven business, rather than a digital one.
I maintain that this entire industry, despite its online and global nature, is based on relationships and technological prowess rather than digital marketing everywhere in the world except for one or two exceptions such as Plus500, however in China, it is completely a relationship business. Therefore, when considering that, who really cares about the digital media advertising ban?
Blackwell Global first began to grow its mainland business in 2010. CEO Michael Chai and astute partners including Jansen Khoo fully understood the Chinese market from the inside. Blackwell Global, with its headquarters in Singapore, is pretty much a Chinese company, and its owners knew exactly how to succeed in the Mainland – by developing a large introducing broker network.
Early on, the company devised introducing broker and sub-introducing broker agreements which were circulated to large strategic partners in important development towns, the sub-introducing broker agreements then formed the basis by which introducing brokers would pay their direct sales teams. Customers in China come to the office, and meet face to face with introducing brokers and portfolio managers who often manage their portfolios by using automated trading systems.
There are offices across the nation which regularly trade 90,000 to 120,000 lots per month on behalf of clients, all of whom work with those eight companies.
BMFN took this one step further. The company is effectively an introducing broker network, with its own introducing broker software solution that is ready to use within just a few minutes. BMFN angles its entire methodology toward what Chinese introducing brokers need in order to continue to develop order flow from local bases across the country, onboarding local clients. Indeed, its management team spends time in the offices of key partners, listening to what they need. BMFN likely spends absolutely nothing on digital marketing, instead investing in a ‘boots on the ground’ approach.
This is the only way to succeed in China. Despite the media-orientated means by which Chinese business is brought to high profile, when it comes to dealing with international firms, regular meetings with key partners is critical. Those who attempt to garner relationships such as these from afar will never gain traction.
For that reason, the ban on digital media marketing is completely irrelevant, especially in the aftermath of IronFX’s now high profile reputation for alleged non-payment of withdrawals or commissions to introducing brokers and affiliates across China. The company had a vast network of affiliates and introducing brokers in China, and now has none. Any spend on digital media would not be able to turn this round.
The company originally gained its traction by employing a Chinese sales force, customer support team and several local partners, yet once any doubt is cast, the entire network goes elsewhere.
To gain business in China, personal relationships are critical. In very few cases do introducing brokers with vast portfolios bring their clients to brokers by clicking a marketing advertisement and signing up remotely. They want to meet the executives, study the terms, view the company’s pedigree – is it listed? How long has it been established? Is it regulated in a top quality jurisdiction? These matters are usually discussed face to face, not via an automatically generated lead which was created after clicking on a banner advertisement.
In a meeting with Lubomir Kaneti, COO of FXDD in New York, Mr. Kaneti demonstrated that he has a very concise understanding of the modus operandi of Chinese IBs. “The Chinese IBs are entrepreneurs in their own right, and respect companies that let them focus on building their business. They need to focus on building their network and developing more business, whilst the broker has to be reliable in delivering a comprehensive brokerage service that does not impede the IB’s goals and allows them to concentrate on their business.”
“You don’t have to be the latest and greatest, but you have to be serious and provide top quality service, and build trust. The IBs are very keen and actively looking to sell a specific premium brand to their customers, therefore it becomes easier to do so as it becomes a well known brand in China if the company provides good quality customer service” – Lubomir Kaneti, COO, FXDD
In terms of gaining trust, Mr. Kaneti considers it to be rather like growing a traditional British garden. “The similarity is that after several years of cultivation and attention, an immaculate lawn will result, but after the lawn has been completed, you have to go back over the parts that have already grown and ensure that no weeds have appeared, and then plant some flowers to show additional attention to detail” he said.
Chinese introducing brokers are indeed detail orientated and are very astute. They realize that they have a responsibility toward client monies which are being transferred out of the country. For example, I was asked by introducing brokers from Shenzhen to Zhengzhou about the reliability of FxPro.
FxPro is one of the largest retail FX firms in the world, and is very prominent among Cyprus’ retail giants, and has a very good reputation, however due to the closed nature of China’s internet, and the lack of research that can be conducted on firms in the outside world, what Chinese people see is a red, rectangular logo, a CySec license number and automatically liken it to IronFX. Of course, to those in the free market, the two firms are chalk and cheese, but if a digital blindfold was applied, it is easy to see how this deduction can take place.
Thus, for a firm to succeed, regular visits to the offices by executives need to take place. Many British companies such as City Index, LCG and IG Group, despite their potential attractiveness to Chinese investors – one particular Chinese introducing brokers with a $40 million book explained to me that he looks for FCA regulation, public listing on a major stock exchange (stock exchange sites are not blocked in China, so therefore IBs can check material information) and a 15 year minimum establishment. All of the aforementioned firms meet this criteria, but they do not angle their business toward China. No Chinese sites or material, no visits to Chinese IBs and portfolio managers and no developed understanding of how to maintain loyalty from Chinese partners.
GKFX is the only ‘British’ spread betting firm that has managed to gain a substantial network in China, and this was not done by digital marketing. A trip to every introducing broker office in the development towns will reveal a Chinese language GKFX brochure on the reception desk, and a quick discussion with the owner of the company will reinforce an understanding of corporate loyalty.
On this basis, relationships and continual visits to the important strategic partners is what counts and what brings returns, therefore the recent Baidu ban should be of no consequence whatsoever to those firms that get China right.
All photography copyright FinanceFeeds#Baidu, #China, #Forex advertising