Want to get FX deposits out of China? The plot thickens: Analysis

Are brokers allowed to transfer money in and out of China for the purposes of funding FX trading accounts? Who knows? ….. and why take the risk? We examine the current situation

For many retail FX companies that do not have joint venture operations within mainland China, conducting business in the People’s Republic is often viewed as a hit and miss affair.

In one very attractive respect, it is a massive land of opportunity, with extremely knowledgeable traders across the entire nation continually analyzing the global markets in order to invest the monthly returns from gigantic real estate investments into liquid FX trading, often to the tune of tens of million per customer, all in managed funds accounts, neatly administered and organized by equally knowledgeable introducing brokers.

The opposite end of this is the closed nature of China’s business environment, locked behind the most sophisticated internet security system in the world, operated by two million government officials to ensure that absolutely no direct contact with the free market economies of the world can be established, and thus leaving all Western companies wishing to participate at the complete mercy of the Chinese government.

In December 2016, The State Administration of Foreign Exchange, which is China’s currency regulator that is owned by the People’s Bank of China, which in turn is owned by the government stated that it wanted to close loopholes exploited for purposes such as money laundering and illegally channeling money into overseas property.

The regulator left unchanged quotas of $50,000 of foreign currency per person a year, hence citizens faced extra disclosure requirements from January 1 this year, the most important being that customers sending funds abroad under this amount have to declare and sign for what the purpose of the transfer is, and if it is for securities trading (including FX), then it is not permissible.

Whilst the official government stance is one aspect, there are several methods in action which attempt to circumvent the system used to identify funds being transferred out of China, one of them being the use of algorithmic payment solutions providers that use a third party to deposit the funds, and then transfer them to the end destination once outside the firewall.

This is a method that is widely used, however it is worth considering that last year, PacNet, which owns Counting House, was placed on the sanctions list by the US Department of Treasury for money laundering, largely due to its activities in passing payments to third parties to ‘clean’ them before sending them to their end destination. FinanceFeeds conducted considerable research into this matter at the time.

This week, a new perspective has been put forward by the un-transparent State Administration of Foreign Exchange, in that the regulator has stated that there has been no regulatory obligation issued with regard to transnational financing of imports, this being contrary to some mainstream analysis that the Chinese government was continuing to clamp down on capital flows overseas.

Just two days ago, the Chinese regulator reiterated that enterprises can handle authentic, legal foreign exchange revenue and payments directly in banks and also clarified that cross-border guarantee business with authentic trade and investment backgrounds are not affected.

This is absolutely contrary to its report in December, however it is important to recognize that the Chinese government does not necessarily have an obligation to report its exact line on any specific policy, and that news reports in Chinese media on this matter are heavily censored and often littered with red herrings.

eToro’s Jasper Lee understands the critical importance of correct corporate structure

If it is the case that overseas enterprises can handle FX payments directly to banks, then that means that the operation of an omnibus account between an IB and Western brokerage should be uncompromised, however any IB or brokerage prepared to take the risk of doing so would have to be prepared for a potential seizure of the account should the Chinese government decide that operating in that fashion is not aligned with the correct method, which is via joint venture partnerships and the establishment of an office in mainland China which is subject to government control.

According to the vast majority of brokerages in mainland China that have discussed this at length with FinanceFeeds, market execution and accurate pricing is paramount, and it is clear that there is a homogeneous commonality among Chinese portfolio managers, brokerages and large scale introducing brokers in the level of detailed understanding of the entire structure upon which the electronic financial markets system operates globally.

Simply receiving money from clients via various algorithmic payment channels, or forging remote relationships with introducing brokers has been a model employed for quite some time now, which is an absolute display of lack of ability to navigate the business environment in China.

Thus, there are two status quo situations that exist at the moment:

Firstly, the method by which Western firms establish a joint venture partnership with a Chinese entity, with sufficient government control and commercial interest in order to make the joint venture count as a Chinese company, completely hosted and operated from within China.

Many western prime brokerages operate this model and provide service to Chinese IBs and brokerages across the country. This enables Chinese brokerages to access global liquidity on an aggregated, multi-source basis and is one of the main reasons why so many brokerages and IBs the length and breadth of the land favor companies such as FXCM, Saxo Bank, Advanced Markets and GAIN Capital as partners.

These companies operate Chinese-centric offices and have that ability to distribute bank and non-bank liquidity via Tier 1 interbank partners in London, as well as electronic communication networks which consist of non-bank counterparties such as Hotspot FX, XTX Markets, Citadel Securities, FXall and Currenex.

It would be extremely foolhardy to assume that, despite the impenetrable firewall and continual government interference, Chinese IBs and brokerages do not understand how these companies aggregate liquidity or what the quality of it is in terms of pricing and execution. They all do, very clearly indeed.

The second method, which is about to absolutely mushroom is the Chinese domestic banking system’s market liquidity extension to OTC derivatives firms.

The advantage that this has is that there is a uniformity throughout the entire component system from bank to prime brokerage, to brokerage and risk manager. The entire set of firms that provide each service are overseen by the government, (in most cases partially owned by the government), and would operate in a ‘hewn from granite’ fashion rather than as a set of separate solutions, and would be inside the firewall that protects the most enormous and highly educated retail and institutional market in the world, thus no barriers would be present.

Thus, bearing in mind the continued ambiguity that surrounds China’s ruling on cross border payments for the purposes of operating FX firms, those who do not establish in China and continue to hope for the best would be, well, hoping for the best.

FinanceFeeds maintains that the only way to operate correctly and with any sustainability is to operate a joint venture partnership within China, partially (or fully) owned by a Chinese entity with the mandatory government stake and full Chinese banking and account funding facilities via UnionPay and bank transfer.

Image: The Bund, Shanghai. Copyright FinanceFeeds



Read this next

Digital Assets

Crypto lender Nexo investigated by 8 US state regulators

State securities regulators in New York, California, Kentucky, Maryland, Oklahoma, South Carolina, Washington and Vermont are investigating crypto lender Nexo for allegedly failing to register its Earn Interest Product.

Metaverse Gaming NFT

Astar Network’s ad features 329 top brands to support Web3 in Japan

Blockchain innovation hub Astar Network is making strides in promoting the Web3 adoption worldwide. In yet another milestone, the smart contracts platform has run a national newspaper ad in Japan that set a new global record with participation from 329 blue-chip firms.

Digital Assets

Pyth Network welcomes onchain data from crypto market maker Auros

“By sharing our high-frequency trading data with a truly onchain decentralized network, we aim to foster innovation that will lead to better financial solutions for all participants.”

Digital Assets

Tokeny integrates Ownera to boost liquidity of tokenized assets

“The adoption of FinP2P will result in higher liquidity and better access to capital and assets by providing regulated firms with one secure point of connection to multiple digital asset networks across the globe.”

Digital Assets

BingX launches subsidy vouchers to cover user losses in copy trading

“With the introduction of copy trade subsidy vouchers, new users can easily try out trading strategies without incurring losses.”

Digital Assets

Talos expands sales team: Frank van Zegveld, Matt Houston, Hillary Conley

“The extensive leadership and industry expertise of these new hires will enable us to build long-lasting relationships as we continue to build out our global presence in EMEA and beyond.”

Executive Moves

FX and CFD broker Emporium Capital hires industry veteran Robert Woolfe as COO

His past experience within the FX and CFD industry includes top roles at Capital Index, London Capital Group, GKFX, ETX Capital, and IG.  “I’m delighted to be part of the Emporium Capital team and spearheading the brokerages global expansion plans”, he said about the appointment.

Retail FX

Hantec Markets wins six categories at Global Retail Forex Awards 2022

Hantec Markets has recently rebranded with a new website and a renewed growth strategy that features the #TimeToStrike hashtag to signify a time of renewed growth for the broker.

Industry News

Nexo sued for operating crypto brokerage without license and lying about it

“Nexo violated the law and investors’ trust by falsely claiming that it is a licensed and registered platform. Nexo must stop its unlawful operations and take necessary action to protect its investors.”