China’s easing of currency trading rules boosts retail FX

The People’s Bank of China (or “PBOC”), which acts as China’s central bank, announced that as of today (Monday April 16) they will allow the Yuan to trade in a band of +/- 1% per day versus the US Dollar. That is double the old band of +/- 0.5%.

Interestingly (and rarely), the release announcing the change went out in English, which as the BBC points out indicates that China’s authorities are taking serious steps to (slowly, step-by-step) open their currency and financial system.

As we wrote earlier, this represents the latest in a set of easings the PBOC has enacted in recent months, which has also included and benefited the retail FX industry. Just four years ago, the PBOC took aim at foreign FX firms which took Chinese clients, taking measures to shut down their activity with those clients. Most notably hurt in that effort was Gain Capital (Forex.com), which in 2008 did about $14 billion per month in volume with Chinese residents, or about 12% of its overall volume. After the PBOC’s actions that number went to near zero in 2009 and 2010 (see graph below).

However as the PBOC has slowly opened things up, more and more firms such as Gain Capital are returning  to China (or targeting it for the first time), mainly via Chinese language marketing (in media outside China) and via IB relationships. And these efforts are showing results. In 2011, Gain Capital ‘s Chinese volumes were back up to about $4.5 billion per month — not quite what they were in 2008, but certainly significant and moving in that direction.

The PBOC’s current move is likely to increase the volatility of the Yuan, which we believe will attract more China-based retail clients to FX trading, much of it with foreign firms.

One of the reasons we’re seeing more and more leading global firms expand in Australia is the use of that country as a base of operations for Asia-Pacific, and in particular China. China recently signed a $31 billion currency exchange deal with Australia, making it easier for companies and banks in each country to do business in the other. Australia’s financial regulator ASIC is viewed globally as a credible regulator, making Chinese (and other) nationals comfortable in transferring money to Australia, and in trading with firms based in Australia.

For more on the global FX market see the LeapRate Dow Jones Forex Industry Report.

Read Also: