S SOMEONE WHO HAS THEIR FINGER ON THE PULSE AND A REGULAR VISITOR TO BOTH HONG KONG AND CHINA, HOW DO YOU SEE THE DIFFERENCES IN BUSINESS CULTURE COMPARED TO LONDON?
There are enormous commercial differences between companies that operate in mainland China, by comparison to any other region in the world, including their immediate surroundings. A much overlooked anomaly is the government’s view on transparency of information.
It is entirely possible, for example, to be a Chinese brokerage, and use a counterfeit platform, which could be either a parody of MetaTrader 4 or of that provided by a local software provider, and have no connection to a liquidity provider, and then operate a multi-level marketing exercise to onboard clients. This would be frowned upon tremendously in other markets, but because the Chinese government can see all of the operations of the brokerage, including its bank account, client database and activities, it is more concerned about that than the actual structure of the broker.
A Western firm, with a full license or its own platform, a genuine prime of prime relationship and its customer service very much focused on client needs may get blocked purely due to lack of ability to see the information by the government. Other differences include the completely B2B nature of China’s retail FX industry, and the lack of tolerance for unpaid capital, even though clients are not really allowed to transfer funds abroad. Unlike in other regions, when something goes awry, no arbitration exists, so customers often band together to stage media-centered protests and then distribute them on television and social media across the country.
The level of knowledge and understanding is vast among Chinese market participants and trust is vital. IBs will never tell a broker that they do not trust them, they’ll simply smile and then never conduct business with them so brokers need to be sure they have the right value propostion before going to China, and need to have everything in Chinese as well as hosted and operated from within China, using a Beian Chinese internet license and local government- operated payment facilities and a China-specific CRM so that the government can see customer records.
S WELL AS BEING A PREMIER SOURCE FOR NEWS, YOU WERE ALSO THE FIRST TO HAVE A DEDICATED CHINESE NEWS FORCE AND INFRASTRUCTURE BASED LOCALLY. HOW DOES THIS GIVE YOU AN ADVANTAGE OVER OTHER NEWS VENDORS?
Our advantage in having a Chinese news source whilst being a premier FX industry resource for global companies is that we are able to match Western firms with important Chinese partners and do so with the ability to ensure compatibility and synergy, and are also able to bring Chinese partners to Western firms. We also have the advantage of having vast coverage across China, in a sustainable manner because we are hosted in China, and therefore have completely unrestricted reach, and are recognized in the FX industry’s Chinese media channels, all of which are monitored by the government, but also we are the only company in our sector that holds a Chinese Beian internet license and has a .cn domain registered as a reporting entity for the FX industry. This gives us inside knowledge from China to provide to Western firms to help them make business decisions, and also gives us presence when promoting Western services to Chinese firms. It also provides trust, as we are fully vetted by the government.
HAT ADVICE WOULD YOU GIVE TO ANY WESTERN COMPANY LOOKING TO SET UP IN THIS HIGHLY COMPETITIVE REGION?
Entering mainland China is not only competitive, but requires a completely different approach to commercial structure, and is heavily dependent on face to face relationships with important partners. FinanceFeeds offers a full consultative service that helps firms establish and structure themselves in China in the right and proper way, as well as provides introductions to key partners in order to commence business in a sensible manner for the long term.
HEN WE TRAVELLED TO CHINA TOGETHER, I COULD SEE THAT THE FX BUSINESS HAS EVOLVED THEIR RADICALLY OVER THE PAST 8 YEARS. WHERE DO YOU SEE IT GOING IN THE NEXT?
The only way ahead is Chinese media, Chinese presence and Chinese banking. All other channels will not work. China may well indeed be a land of opportunity, however its internet is domestic, its payment solutions systems and banking infrastructure is domestic, and the entire environment in which the country which powers the entire world’s industrial, commercial, intellectual and financial world is impenetrable to the outside world, and vice versa.
This has made China, in the eyes of western brokerages, relatively akin to an oasis in a huge desert which, after massive effort has been made without resources to approach it, turns out to be a mirage. As a result, many brokerages which have managed to forge some relationship with Chinese IBs or via media campaigns that have been small enough to not be of consequence to the all-seeing eye that is the Chinese firewall, have rested on their laurels and let this continue. No longer are there any more dialogues about Western firms buying institutional providers in China as had been the case last year. Instead, Western brokerages are focusing on increasingly basing their operations in Mainland China, which is absolutely evident in the retail companies here at today’s conference.
Over half of the companies that are here today are Western, however their presence in Shanghai and corporate structure here is completely Chinese and as a result completely aligned and sustainable.
In January, I stood in front of 400 senior Chinese FX industry executives and explained that within a very short time, China will dominate its own domestic market FX industry. Several years worth of extensive research by FinanceFeeds senior management inside China alongside strategic Chinese partners across the entire country has demonstrated that the same constraints do not exist in China as they do outside China. All were in agreement.
Last year was most certainly a year in which the entire prime brokerage sector was subject to a massive amount of evolution in the Western world, largely due to the increasing demand from brokerages for the best possible execution and access to the most accurate pricing and trade processing environment, as well as the counteraction to this, which has manifested itself in the major Tier 1 banks having curtailed the extension of credit to OTC derivatives firms due to their extremely conservative approach to counterparty credit risk.
This has created a situation in which the main Tier 1 banks are now ultra-conservative and are still licking their wounds by selling off retail divisions in their entirety, and restricting how much risk they take on counterparty credit extension to retail brokerages.
Complexity due to lack of credit and massive capital requirements? No problem in China
Meanwhile, brokers which have to face these counterparties have to stump up massive capital bases to maintain relationships with them and still be subjected to last look order execution on single-dealer platforms and then have to strike up relationships with further non-bank electronic communications networks such as EBS, Currenex, Hotspot FX and FXall in order to attempt to provide a more comprehensive liquidity solution against the banks’ pulling the rug out from under everyone’s feet.
The same brokerages are battling with this whilst focusing on mainland China, and its own restrictions toward allowing any transaction over $50,000 (which is nothing because most brokers have an omnibus account or a prime brokerage agreement and have to send much higher figures than that each month to overseas banks of the brokers they work with) out of the country for the purposes of derivatives trading.
China’s own banks, all of which are owned by the state, are massively well capitalized and have a very clever model indeed. They do not expose themselves to risk, and they have assets which consist of property, cash, investments in company stock and indices that are so enormous that it is hard to quantify. These banks, unlike the weary western banks, will extend counterparty credit to FX brokerages in China without the blink of an eyelid over risk. Western banks are already wounded enough and are restricting what they can see quite transparently. It would be futile for a
Western prime broker with no presence in mainland China to go to a Western bank’s eFX desk and ask for a large prime brokerage deal because of a massive Chinese partner that has been onboarded.
There is no way for the bank to check how large and how well capitalized that firm is, as one is one side of the firewall, and the other is, well, the wrong side. The answer would be no.
For Chinese banks, offering Chinese liquidity to Chinese prime of primes and then distributing aggregated feeds to Chinese FX brokerages, the sky is the limit and this single factor, when it unfolds and is in place on a widespread scale, will cause the Chinese FX industry to absolutely mushroom in volume and power.
Prime of primes that have presence in China, that are not Chinese by origin, including Sucden Financial (HK) Ltd, Advanced Markets (Shanghai) and Saxo Bank’s APAC division will be able to participate very freely in this because they will be considered Chinese entities as they have their entire infrastructure based in China and therefore inside the firewall and under the all-seeing eye of the Chinese government.
There is also now new evidence that the Chinese government’s domestic-market-orientation is never going to wane, however the country’s banks are powering the APAC economy’s other strong FX areas that are a sleeping giant, unnoticed by Western eyes.
How can the major FX tier 1 dealers in London such as Barclays, JP Morgan, Citi, Deutsche Bank and HSBC as listed in the chart above have such a lowering market share, yet still be favored. This is because China is entering the global arena via the back door. Of course, domestic FX industry executives in China know that only RMB liquidity can be offered at good rates and good execution by Chinese banks, the rest is foreign, and anathema to the Communist government, however looking at South Korea’s FX order flow figures for the past three months tells the story exactly how it is.
The daily FX turnover by local and foreign banks in South Korea rose 11.9% in the first quarter from the previous quarter, and the daily FX turnover averaged $49.98 billion in the January to March period, compared to the previous quarter’s $44.66 billion, according to the Bank of Korea.
So what? Well, South Korea is becoming an area of opening to the world for China’s FX liquidity. South Korea and China launched a direct exchange market for their currencies in December 2014, meaning that Yuan can be exchanged directly and then traded in other currencies and against other currencies by local and foreign banks in South Korea.
This has now been taken up by many participants and the daily trading volume of FX spots reached $19.41 billion in the first quarter of this year up 11.8% from the previous quarter.
Thus, South Korea itself may not be the originator of Tier 1 liquidity per se, but it is one of the outposts for Chinese connection from banks to the outside world, and is eating into global market share whilst said banks are unburdened with the woes of Western stalwarts.
As last year drew to a close, Singapore continued to dominate as the largest FX centre in Asia for Interbank dealership.
The average daily trading volume of Singapore’s FX market was US$517 billion in April 2016, up 35% from US$383 billion in April 2013. Singapore’s share of global FX volumes has grown to 7.9% in 2016, from 5.7% three years ago.
The expansion in Singapore’s FX market was chiefly driven by growth in G10 and Asian currencies such as the Yuan (78%3), JPY (67%3), GBP (60%3) and Korean Won (55%3). Foreign exchange swaps made up the largest traded foreign exchange product class in Singapore and accounted for 48%4 of all trades, followed by spot (24%4) and FX forwards.
This clearly shows that the Chinese Yuan is using Singaporean bank trading desks as an outlet on the live international market, and the high Korean Won (KRW) figure shown here is likely due to the Yuan-Won direct exchange facilities in Korea.
Bear in mind that many brokers in China are looking to become increasingly dominant and have the purchasing power and balance sheets to gain whatever they want as most have over $250 million in assets under management and in some cases dwarf the brokers that they refer business to, and the market structured in this way represents the future.
Of the major London and Sydney based prime of primes, all of them have significant presence in China, with local offices, local hosting and the ability to serve a local Chinese audience of brokerages with Tier 1 liquidity from within the mainland, Chinese management and Chinese systems that are government friendly. A very smart move, because those who do not have any Chinese presence will soon be joining the inhabitants of the Jurassic era.
HE LAST TIME WE TRAVELLED TOGETHER, I USED YOUR IB SYMPOSIUM TO INCREASE OUR CHINESE BUSINESS. HOW DID YOU DEVELOP SUCH AN EXTENSIVE NETWORK OF HIGH VOLUME TRADERS AND BROKERAGE CONTACTS?
It has taken several years, and a lot of actual meeting (originally with an interpreter) of Chinese industry executives. Originally, I personally spent time researching Chinese FX with an executive who is close to the government in Beijing, and then several trips to second tier development towns to meet IBs, brokers and to study their client base. I then began working with Western institutional firms and brokerages with significant presence in order to develop a depth of knowledge in China. It was a long and very interesting method, but there is no way to do it properly remotely, and there is only one way to do things in China, where every company is now focusing, and that is properly, especially due to its ‘closed’ nature.
HIS FOR ME WAS MONEY WELL SPENT AS WE DEVELOPED HUGE AMOUNTS OF VOLUME, AND GOT EXPOSURE TO OUR NAME. I PREFER THIS MODEL TO RATHER PAYING $50K FOR A BOOTH AND SEEING THE USUAL CARPET TRADERS AT AN EXPO. HOW OFTEN DO YOU OFFER THIS SERVICE AND HOW SHOULD PEOPLE CONTACT YOU FOR THIS BESPOKE SERVICE?
This bespoke service can be offered as many times as required, to any type of firm that wishes to meet a minimum of 50 IBs or brokerages in China, and can be produced in Shanghai or Guangzhou. Seminars are exclusive to one sponsor, and are aligned toward the services of the sponsor.
N MY OPINION YOU HAVE SEPARATED YOURSELF FROM OTHER NEWS VENDORS, AS YOU ARE NOT RELIANT ON PR PIECES. HOW WILL YOU BE LOOKING TO CONTINUALLY EVOLVE FINANCE FEEDS, AND HOW WILL YOU BE DOMINATING YOUR SECTOR IN 2018?
We will continue to conduct extensive and detailed research, will associate ourselves as usual with the high end in terms of companies in the industry that can provide the most astute and knowledgeable information across all sectors, will make sure that we report from within the commercial operations of companies from retail brokerages to institutional providers, and will associate those working with us with high quality and a clear and deep understanding of the business. We will constantly work with our audience and our colleagues across the world, and will make sure that our events remain a focal point to provide important value to executives to take our part in helping drive the business forward for quality firms.
Article by: Andrew Saks Mcleod of Finance Feed | www.financefeeds.com