Forex Trading, China:-

China, does not have a free market economy, hence remains an unusual place to start a business. As a result, the political structure is closely tied to economic growth. The communist government in China, in one way suppresses development, but also fosters, and sponsors the growth of Chinese industry, and its expansion overseas. This in turn protects domestic industries, which gives it an edge as a nation over the others in the BRIC category.

A persistent difficulty for forex brokerages is that China is more or less impermeable to western companies as the entire business methodology in China is in stark contrast to other global models. Strict restrictions on non-domestic companies operating for forex trading, China, seizing financial assets of companies participating in JV’s with Chinese organizations, and blocking bank accounts of foreign companies operating in Chinese territory, makes it a hindrance for growth, sometimes.

The Chinese government, and regulators view forex as a highly leveraged product which carries too much exposure. Specifically, in China, when we look at the huge population, huge losses in savings can end up in a crisis that would shake social stability. Chinese people have that inherent risk-taking attitude in their blood, and also have a lot of savings, due to lack of social welfare. Hence, the risk of losing out precious money, in lieu of forex trading, is very real, and dangerous.

The government however, also considers forex as a more “fair game”. With the huge market, clients can become better off without market manipulators, but opening up to OTC is a huge step for them, both in forex and in futures.

A recent trend shows that more companies are trading goods and services with China, and pricing it in yuan instead of dollars. The fourth quarter of 2013 saw a 30% increase in yuan trade settlements, up from the second third quarter. Although the currency remains tightly controlled, the Chinese government and many fund managers are betting on the yuan becoming the new yen in Asia. According to the Bank, dollar activity in the 4th increased by just 2%, while euro,pound and yen trade, all declined.

Last year, China’s merchandise trade exceeded $4 trillion, making it the world’s No 1 trading country. Total cross-border yuan settlement was 5.16 trillion yuan, up 61% year on year.

Current Foreign Exchange Institutions.

China’s Forex market is comprised of 2 parts. The inter-bank or wholesale market and the retail market.

Major parties involved in the forex market are

1) CFETS which functions as a trading platform for inter bank markets, and is responsible for clearing the market and for providing the supervisory authorities with market information

2) PBOC and SAFE as regulatory authorities3) Designated FX banks and non-banking financial institutions and non-financial

enterprises authorized by SAFE to engage in foreign exchange business4) The enterprises that can earn and spend Forex.5) Individuals who have forex trading needs.

China’s FX market is limited in product scope mainly to spot trading in US dollars. For a long time since its establishment, the inter-bank market offered spot transactions only until August 2005 when inter-bank forward and swap were introduced.

The two factors that most seriously constrain development of China’s FX market are the compulsory FX settlement system and the rigid exchange rate regime. Specifically the rigidity in exchange rate imposes limits on the growth and diversity of the FX market. But at the same time, allowing more flexibility in the exchange rate requires a broader, more diversified, competitive and efficient market platform on which the forces of supply and demand can determine the RMB value of foreign currency.

Development of the FX market provides the needed foundation for any move toward greater exchange rate flexibility.