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 set up offices in China but they are 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 necessary to have a presence locally. Chinese people are highly skeptical of business that is entirely online and are looking for the company 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 right 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 built their network of IBS as well as developing their own sales team. A new trend has been established in China as some IBs are now cutting out the middleman and setting up their own Forex Broker. A popular jurisdiction for these brokers in 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.