China Allows Three More Brokerages Access to Interbank Forex Market

China’s forex regulator for the first time in more than four years allowed three additional brokerages to trade on the domestic interbank foreign-exchange market.

The move is another step in China’s overhaul of the forex market to increase the diversity of market players and improve the market’s liquidity.

The State Administration of Foreign Exchange Thursday approved pilot qualifications of Citic Securities Co., Huatai Securities Co. and China Merchants Securities Co. to conduct interbank forex business both in proprietary trading and on behalf of clients.

Previously, Guotai Junan Securities Co. and Harvest Fund Management were the only two nonbank participants. They were granted forex trading licenses in late 2014 and early 2015.

Since then, some brokerage companies have established forex teams but couldn’t obtain the licenses, a person at a brokerage told Caixin.

Currently in the interbank forex market, brokerages mainly conduct proprietary trading, in which the companies trade forex with their own money instead of clients’ funds. Their trading is mostly renminbi netting transactions, where the trader offsets the value of multiple positions.

The main players in China’s interbank forex market are still commercial banks and companies that have foreign currency needs for imports and exports.

China maintains tight control on the interbank forex market. When companies need to exchange renminbi into foreign currency to pay vendors, they have to go through banks and prove the transaction is for actual business purposes. Previously, only banks were allowed to conduct speculative forex trading.

A former Chinese central bank official suggested that allowing more nonbank players, including brokerages, fund managers and option traders, to conduct speculative trades in the interbank forex market could boost the liquidity of the market.

Nonbank financial institutions have forex needs in their cross-border securities investments, and such transactions are usually in small amounts at high frequencies, which could increase the liquidity of the market, said Guan Tao, former director of foreign exchange regulator’s Balance of Payments Department.

Contact reporter Denise Jia (huijuanjia@caixin.com)