Forty well known FX brokerages have been listed by Chinese authorities as operating illegally in China, some of which have massive customer bases across the country and are living from customer losses. The Bank of China has instructed payment service providers to cease providing service to them, in order to stop their business at source. The only way in China is to have a fully legitimate operation within the country – Rep offices and back-door onboarding will not work
During the past few weeks, research by FinanceFeeds from within mainland China has deduced that the Chinese government and associated state-owned entities including the government-controlled internet system and the Bank of China have been taking a more proactive stance with regard to the limiting of overseas FX firms with no presence inside China.
Very recently, FinanceFeeds China reported that the government had initiated an Internet Protocol (IP) block on several retail FX companies from various regions of the world which had a large Chinese direct retail customer base yet no operations within China.
Whilst the block did not last very long, it demonstrates that the long arm of the Communist Party is now reaching for those who do not operate from within China’s borders.
During last week’s visit to southern China, many Introducing Brokers and retail FX companies expressed great concern to FinanceFeeds with regard to conducting business with companies without operations inside China, and especially with those from lesser respected licensing jurisdictions where the business ethic is considered to be infra dig compared to that of London, Sydney and North America.
Today, the government’s attempts to remove retail FX companies that do not comply with the Chinese rules on conducting business from within the mainland have increased, and FinanceFeeds has been provided with a full report, including the fully documented names of the FX companies that are the subject of the report, that has been conducted by the Bank of China.
This manifested itself in an official publication by the People’s Bank of China branch in Jinan, which issued a notice to investigate non-bank payment agencies which participate in illegal internet-based foreign exchange transactions.
According to the report, SAFE, which is China’s state-operated FX industry regulator, monitored that non-bank payment agencies provided payment services for FX brokerages which are considered to be illegally operating within China. It requires each payment processor within China to investigate the cooperation with the “illegal trading platform” one by one according to a specific list of companies.
If cooperation exists, the business cooperation with the trading platform should be stopped immediately, and all the transaction data and customer information with the platform should be completely preserved for the government to be able to analyze it.
According to the “Risk Warning on Prevention of Illegal Financial Trading Activities via Network Platform” report issued by the China Internet Finance Association in November 2017, all domestic institutions, without the approval of the financial regulatory authorities in China, have been able to appear across all kinds of internet sites, mobile communication segments and application software, which in many cases the government disapproves of.
The authorities make a specific note that these are companies whose platforms provide domestic (Chinese) customers with foreign exchange, precious metals, futures, indices and other product transactions (including cross-border), as well as overseas institutions without the approval of China’s financial regulatory authorities through their foreign owned websites, mobile communications terminals, application software and other network platforms for domestic customers.
Providing foreign exchange, precious metals, futures, indices and other product transactions from outside China is illegal.
At present, the government states that FX platforms (including cross-border) engaging in leveraged transactions such as foreign exchange and precious metals are not legally established within China and the financial regulatory authorities have never approved the establishment of an online platform for the aforesaid trading business. Both parties’ rights and interests in participating in these platform transactions are therefore protected by law.
What is illegal foreign exchange trading platform?
In the late 1980s, it was introduced into China. In the early 1990s, a foreign exchange margin trading fever appeared in Guangdong, Shenzhen and Beijing. In recent years, with the rise of the mobile internet, online foreign exchange trading operations have become more convenient and more rapid.
A survey conducted by the National Internet Financial Risk Analysis Technology Platform revealed that there are a large number of internet-based foreign exchange wealth management platforms for domestic customers in China. This is congruent with FinanceFeeds understanding, having visited various large IBs which manage their clients portfolios, in many cities across the mainland.
The government considers various factors to be of extreme concern, including the promise of “high returns”. The government is also gravely concerned about the execution process used by many firms soliciting business directly in China, actually inferring that many operate a profit and loss B-book model, that being the method by which no trades are transferred to a life market and instead, the brokerage simply steals the customer deposit.
Advertising campaigns that promise very high returns are also aspects that have caused the government to take this action.
Chinese authorities have stated that many of the firms operating from outside China that solicit for direct business from Chinese customers or partners that these platforms not only violate relevant laws and regulations in China, but also operate in what the Chinese government refers to as a “dark-box manner” during the transactions on the platform.
This means that the brokers are suspected by the Chinese government of encroaching upon customers’ funds. They are also suspected of using the “pyramid selling model” to develop their clients. FinanceFeeds is well aware that this is very prevalent in China.
Some foreign exchange platforms develop offline under the name of “mutual financial management” The mode of rebate keeps attracting new investors. This mode is also considered to be pyramid selling. Under the banner of “foreign exchange transaction”, terminology such as “sustained high dividend” is often adopted.
Some platforms raise funds under the banner of “foreign exchange transactions” and carry out “sustained high dividend payout.” The premise of the establishment of such a model is based on the “foreign exchange transactions,” the profit is always greater than the “dividend” basis, but because of the uncertainty of earnings, such platforms are likely to evolve into a “Ponzi scheme” thus the authorities seeks to cut off their payment channel to protect investors.
FinanceFeeds has the full detail, and would encourage all good quality companies that wish to gain our perspective and research on it to contact FinanceFeeds at firstname.lastname@example.org and we will endeavor to provide full advice and information with regard how to ensure that your company is sustainable and that your company has the relevent framework in place to continue operating and upholding its good standard.
We promise complete confidentiality with regard to any conversations that we have with any brokerage executives wishing to speak to us about this in depth, as FinanceFeeds is committed to assisting established brokerages with good business ethic to ensure that they are able to operate and vice versa, to ensure that those breaking the law do not create a vast amount of damage for the quality end of the market.
Any such consultation will be free of charge and completely impartial.