For Retail Forex Brokers one of the biggest enigmas is Forex Trading in China and trying to navigate the Forex Market there. The Chinese Market is very enticing for Brokers but is also one of the most complicated markets to understand.
The regulatory environment can be best described as one great big gray area. Many Forex Brokers have setup offices in China but they are really not supposed to be selling FX products to Chinese citizens supporting clients and servicing them might be ok. The Chinese government knows about these offices and will selectively enforce regulations on some brokers that may have complaints from local citizens. One of the issues that face brokers that are looking to conduct business in China is that it is absolutely necessary to have a presence locally. Chinese people are highly skeptical of business that are completely online and are looking for the business to have a local address so there is a physical place to go to. The double-edged sword is that you could end up on the evening news and not in a good way. Some brokers have even found themselves shut down completely which can be extremely challenging once you have grown a substantial Chinese client base.
Another challenging issue for Retail Forex Brokers is the necessity of dealing with the intricate network of introducing brokers. In China, it seems like everyone needs to get paid at some level and this can lead to a complex of IBS. Dealing with IBS is a necessity in the Chinese Markets. The IB is the one that is vouching for the Broker and many of the IB’s clients are following the IBS instructions. With spreads getting smaller this can be very challenging for the broker to meet all the requirements of the IB.
A few years ago we saw brokers like Gain Capital and Alpari setup locally and build their network of IBS as well as building their own sales team. A new trend has been established in China as some IBs are now cutting out the middle man and setting up their own Forex Broker. A popular jurisdiction for these brokers is New Zealand as there isn’t currently a net capital requirement and it is not as difficult to setup as in Australia or the UK. These brokers have decided to see if they can sustain a brokerage and it is usually dealing with Chinese clients exclusively. This trend may continue as the cost and uncertainty of the Chinese Market may lead to many brokers thinking twice about entering or continuing to participate in the Forex World’s most attractive marketplace.
Trading Forex and Derivatives carries a high level of risk, including the risk of losing substantially more than your initial investment. Also, you do not own or have any rights to the underlying assets. The effect of leverage is that both gains and losses are magnified. You should only trade if you can afford to carry these risks. Trading Derivatives may not be suitable for all investors, so please ensure that you fully understand the risks involved, and seek independent advice if necessary