China spent a year purging itself of global FX brokers. Now it is about to unleash its own monster - FinanceFeeds

China spent a year purging itself of global FX brokers. Now it is about to unleash its own monster

Andrew Saks

Saxo Bank and eToro knew what they were doing when they sold out to Chinese firms. We look at how the government purged the FX businesses for its own greed and own ends. Now may be the time to consider how to structure a Chinese FX company.

As in all totalitarian dictatorships, ‘do as I say, not as I do’ applies to China’s capital markets sector as much as it does to any other aspect of the strictly controlled every day life for 1.4 billion citizens of the oxymoronically named People’s Republic.

Despite the glaringly obvious potential pitfalls, those being the risk of having your brokerage’s operational capital and client funds seized by the government as the banks and all internet infrastructure is owned by the state and conducting foreign business is illegal, having the offices of affiliates or introducing brokers raided, or being brought to a meeting in front of officials and ordered to pack up and leave within 24 hours.

None of these are palatable, and the Chinese government’s efforts to block websites of overseas firms targeting Chinese customers, close the offices of introducing broker networks representing FX brokerages that do not have any offices in China or any Chinese ownership and stage media hysteria such as the boarding up of retail FX brokerage booths at vast trade shows such as the Shanghai Money Fair, filming it and putting it on television complete with propaganda showing western firms as villains and the Chinese government as the savior of the people.

Physical threats, staff coercion and other such unpleasantness has resulted in an almost complete exodus of most retail FX brokers from what had been an extremely organized and lucrative market.

Indeed, back in 2015, FinanceFeeds visited a series of introducing brokers in China, many of which were situated in peripheral, semi-rural areas, within whose offices it was not rare to see such introducing brokers conducting volumes of over 90,000 lots per month on behalf of their clients, via automated systems in the form of MetaTrader 4-based expert advisors which had been developed by the introducing brokers themselves.

This gave full insight into the magnitude of the Chinese introducing broker networks, and their value to overseas retail FX brokers.

Then came the purging, and now the once strong relationships with Western firms via quietly loyal Chinese introducing broker networks have gone the way of all things which are quashed by the state, as the obedient Chinese population has had to concede.

There was always more to this than just a thinly veiled attempt to appear as though the government was acting in the interests of its people. It never does that, it simply serves itself as a gigantic force, with tremendous purchasing power that can swallow up entire national economies in one signature, and whose control and power relies on the total banishment of any information or business from what it considers to be an enemy: the dastardly free world.

Thus, the purge on FX brokers was certainly fueled by a self serving motive, as are all of the well planned, extremely cleverly executed plots by the Chinese Communist Party which literally has a department for absolutely everything.

This week, China has made it easier for firms to manage cross-border renminbi investment and financing by simplifying the renminbi settlement process, an action that was publicly announced by the People’s Bank of China, which is effectively the fiscal arm of the Chinese Communist Party.

The regulations will also allow Chinese banks to open renminbi settlement accounts for Hong Kong and Macau residents with a daily limit of 80,000 yuan, which equates to around $13,000.

What does this really mean?

As China tightens its grip on Hong Kong, in the inevitably forcible move toward communist alignment, it fully understands that Hong Kong is South East Asia’s Manhattan. It has for over 100 years been a fully open, fully international base for all things financial, and has Western Tier 1 banks all over it, conducting transactions for that region in the same way that the same American and British banks do in Canary Wharf in London. Hong Kong and Macau are therefore ideal outposts which are now fully under communist control by the Chinese central government to take its system global using existing infrastructure.

In September last year, the government showed its hand in this respect.

To keep people malleable, they allow state investment into startups, which really means the government is your boss, they allow people to drive luxury cars with the same brand names as Western ones – although theyre all made under license in China – and they allow rampant consumerism, making it look to the untrained eye that China’s population live a capitalist lifestyle.

Nothing could be further from the reality.

Thus, to be able to instil further control over a highly educated and astute, well dressed population that are now used to luxuries, the communist party needs to ‘sell’ ideas that appear innovative and cool when they are trying to curtail liberties.

Steptember’s roll out of such a thing came in the form of a government backed digital currency. It is the first in the world of its type. No other nation has launched a sovereign digital currency.

Wow, how avantgarde, you may have said.

Perhaps even more unbelievably, it is the People’s Bank of China, the company’s central bank that unleashed it onto the ‘market’,

The People’s Bank of China intends to overtake other countries and be the first to issue its digital currency (CBDC) reported Reuters with reference to the Central Bank comment.

And there you have the mainstream media totally misunderstanding this and considering it to be ‘overtaking other countries’ when reality it is another draconian effort to control the spending habits and investment opportunities of the population.

According to the central bank, the right to issue digital assets will become a “new battlefield” between states. Winning the race will allow China to strengthen the yuan’s position on the world stage and break the dollar’s dominance.

Thus, it is likely that the ground was cleared of competitors when removing the successful and much loved western FX firms from China, so that it could dominate this lucrative market itself and make money for the state instead of for overseas privately owned FX brokers.

The only firms who got this right are the ones who understood that in order to stay in business in a single party communist country is to join forces with the government and sell a significant shareholding to state owned large corporations with huge government influence and a large distribution channel.

Saxo Bank, for example, knew exactly what it was doing when it sold to Geely.

Geely is not just an automotive company, it is a way into every aspect of becoming a fully fledged Chinese business with government backing and a vast and varied distribution channel, all set up by the state.

Equally, astute Yoni Assia of eToro knew what he was doing when he sold just 10% of the company to PingAn.

Both are huge and successful in China, and see that as the number one market.

Back in 2017, FinanceFeeds attended a conference held by Saxo Bank in Hong Kong which was totally aimed at the Chinese market, and was attended by high net worth hedge fund managers from across China.

It was clear by the dialog from Saxo Bank executives that this was a company with a very detailed knowledge of the area.

Equally, albeit via a different model, eToro boosted its fortunes from the doldrums to massive success by gaining PingAn Bank’s entire client list as potential customers as its platform was integrated into PingAn’s remit.

Very clever indeed.

The only way now is to join forces and form a joint venture. As the West cowers under endless lockdowns, and China goes forth with its offensive move toward global FX domination, now may be the time to become a Chinese company.

Like them or loathe them, the government of China is the dictator of all business of the immediate future.

 

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