LeapRate’s investigation into the Chinese IB business has revealed that the sheer magnitude of companies which are providing managed FX accounts to retail customers and operating as IBs to western FX firms is several hundred percent higher than in any other region in the world.
In the West, there are established asset managers with large portfolios, however the main difference is that in China, most of the large, highly well capitalized money management companies are less than 5 years old and concentrate on FX only, thus presenting an unrivaled opportunity for FX brokerages, if approached correctly.
Shanghai may well be the destination for overseas delegations, however there are literally thousands of vast, multi million dollar IBs all across China with whom a longstanding relationship cannot be fostered by simply visiting Shanghai, nor by attempting to enlist their services from outside China, as personal relationships are paramount, therefore it has to be done with the investment of time in order to build a relationship from the inside.
China restricts access to many Western websites such as Google, Facebook, Twitter and Gmail, and Visa and Mastercard are blocked, as well as a language barrier which is impassable without translators who fully understand the FX industry, being a major consideration.
Here in Zhengzhou, LeapRate met with Mr. Ding, CEO and Founder of the Cheng Jin Tai company which is a FX IB and asset management firm with a value of $200 million, in order to gain full perspective on the modus operandi of China’s giant introducing brokers.
Getting it right and creating a business empire
Charismatic and youthful Mr. Ding commenced the establishment of what can best be described as an introducing broker business empire in 2002, from his base which at that time was a rural area within a county in China.
He very soon afterwards moved to the city of Zhengzhou, a modern city in the Henan province with a population of 8.6 million, which is approximately 1,000 kilometers from Beijing. Upon arriving in Zhengzhou, Mr. Ding’s business focused on selling cosmetics, and he owned a company that opened distribution channels, with partners which were effectively IBs in cosmetics and metals.
Like many smaller cities in China, Zhengzhou has been the subject of rapid development which is almost incomprehensible to a Western visitor. Just 15 years ago, there was very little here at all, and the few residents were only just beginning to own cars. Today, Zhengzhou’s 10.1 million urban population live in luxury, with a city skyline resembling that of a giant version of Manhattan.
The plethora of luxury cars including Rolls Royces, Porsches and top of the range SUVs grace the 6 lane boulevards, and the several million business people which inhabit Zhengzhou are sophisticated and determined.
After 7 years, Mr. Ding entered the FX industry in 2009, with his company Cheng Jin Tai, in order to build up a large scale IB using his experience gained in fostering partnerships in other industry sectors in which he had generated concrete, longstanding relationships.
Mr. Ding explained to LeapRate that before his entry into the FX industry, he had made a huge investment into the coal and metals business, which was a very big bet. and the market fell in 2008 which wiped out his entire investment.
Mr. Ding explained to LeapRate “I was looking for a way to recoup these huge losses, and therefore came into the FX industry with some friends. By this time I knew how to build this structure of an IB business, therefore I was able to implement this model, with great success.”
“I learned that one of the hardest things to overcome with regard to gaining a large customer base is that there are so many investment opportunities from various companies in China which are being offered to retail customers with high returns. Even though my managed accounts were making money for the clients that I had onboarded, they would be tempted to invest in a firm which offers high returns, and many of them lost all their money by doing so because most of the investment products offering high returns are scams” he said.
As a result of having built up a small client base during the first year in business, Mr. Ding was able to gain the trust of all his clients because his managed portfolios were performing and generating results, which were able to be demonstrated on a widespread scale to other clients in China.
What brokers entering China should bear in mind
Mr. Ding clearly understands the pitfalls experienced by many Western FX firms in their quest to enter the Chinese market via IBs.
He explained to LeapRate the most important aspects that he looks for when selecting a brokerage with which to partner and refer business, as follows:
1) History: A brokerage firm must have a proven track record, and Mr. Ding wants to see that a company he works with has been in the business for a minimum of 15 years.
2) Economies of Scale: The company has to have a presence in at least 10 countries.
3) Regulation: Financial Conduct Authority (FCA) British regulatory license is very important and regarded very highly.
4) Execution: Mr. Ding places an emphasis on looking for brokers which provide a good trading environment with perfect execution, and a decent cost associated with the company. The spreads have to be at least competitive and not too high, and the rebates should be representative of the market and not too high or low.
From $0 million to $200 million in 5 years
Mr. Ding explained a very interesting path that his company, Cheng Jin Tai, took toward becoming a large IB.
In the first year, he was not looking to expand rapidly, instead using that time period as an educational period to learn how to go out and get clients. “It wasn’t about how much commission per lot, it was about how to get the clients, who had managed accounts with us, to gain a return that year” explained Mr. Ding.
Cheng Jin Tai offers managed accounts only, there are no direct retail traders, therefore a record of successful results had to be demonstrated in order to gain more clients and build the business. Once this initial period was over and some results could be shown, clients began enlisting the services of Cheng Jin Tai of their own accord.
This led to exponential growth from 2010 until today. Mr. Ding explained to LeapRate that from the time that some performance was able to be viewed by potential clients who subsequently invested with Cheng Jin Tai, the company’s assets under management grew from between $5 million to $6 million in 2010.
This peaked in 2012 following a period of successful returns which attracted further clients from all over China, raising the assets under management of the company to $100 million.
Exponential growth all across China, 1900% increase in AUM
At the time during which the company had achieved its 1900% increase in assets under management, Cheng Jin Tai had 2,000 sub-IBs and was delivering them a 50% return which was generated by trading profit.
Aligned with LeapRate’s current inside investigation into the Chinese IB business, Cheng Jin Tai’s business model also relies on raw spreads and no commisions, thus the revenues are generated by trading profits.
Once Cheng Jin Tai had grown to such a level that it, despite being an IB, had become larger and better capitalized than some western FX brokerages, Mr. Ding began to look toward opening subsidiaries in other regions of China.
From his headquarters in Zhengzhou, he opened offices in Henan, Shendong, Zhejiang, Sichuan, and Jiangxi, and is looking to open further offices in Xinjing, and Jilin, which is the North East part of China which has a huge population.
China will dominate global FX in less than 10 years
Now, the company is looking to open subsidiaries in Beijing and Shenzhen.
From these offices, the company now operates approximately 5,000 sub-IBs which are dedicated only to referring managed FX account business to Cheng Jin Tai.
Mr. Ding concluded with a very interesting anecdote which is likely to be of great interest to many FX industry professionals :In terms of the FX industry in China, there are many misconceptions” he said.
“Within 10 years, China will be home to by far the biggest FX industry in the world. Absolutely within the next few years, Cheng Jin Tai is looking to acquire an FX firm outside of China and really explore the possibilities of taking the business global.”
LeapRate is currently investigating the Chinese FX market infrastructure from IBs and large investors, to Chinese companies preparing for IPOs on western venues. Follow us for full, in depth coverage from across China.
Photographs: Andrew Saks-McLeod discusses the Chinese IB industry with Mr. Ding, CEO of Cheng Jin Tai, in Zhengzhou, China.