A screenshot of a receipt showing how a Chinese investor suffered a huge loss in Yuanyou Bao (a paper investment product) was widely circulated in China after the crude oil prices dropped below zero in April 2020. The investor bought 20,000 crude oil futures contracts for 3.88 million yuan (US$540,000), but was forced to close positions at -US$37.63 per contract. The investor lost all his 3.88 million yuan and owed the Bank of China another 5.32 million yuan. A deluge of criticism arised, which was sensible, because it was beyond anyone’s knowledge that any investor can be heavily indebted to a bank afte losing all the principal in the structured product. After negotiation, the Bank of China agreed to bear all the losses caused by negative prices and compensated 20% of the margin deposit for individual investors. Compared with the domestic stock market, the foreign exchange market is much more regulated and mature. The daily trading volume of the foreign exchange market is more than 1,000 times that of the domestic stock market. The "margin" is a typical sign of this specification. So what is the situation in the domestic margin market? May wish to understand this article. Phase I 1993-1994 As China's reform and opening-up picked up pace and embraced the world with wider arms in 1993, the foreign exchange held by individuals through overseas remittance grew rapidly. However, the market at that time was in shining contrast to people's increasing desire for investment due to government regulations on investment on B shares. At the end of 1993, under the approval of the People's Bank of China, the Bank of China took the lead in lauching China's first forex-related product "Wai Hui Bao", or "Forex Treasure", for individuals to trade a variety of currencies and avoid exchange rate risks. Many similar companies started to follow. In the early 1990s China has not established a well-regualted forex market, and the good intention of the government was taken adavantage of by many fake foreign brokers or "dummy corporations" who provided illegal forex business requiring margin but in fact swallowed all the principals of the investor. To manage the market, the China Securities Regulatory Committe launched a campaign to crack down on illegal business operation and banned all types of forex option trading. Nevertheless, forex margin trading didn't vanish. In the late 1990s, thanks to the emeging of Internet, many Chinese investors were seeking new investment opportunities overseas, and online margin trading, with its low threshold and high return, became a populart channel and attracted many domestic enterprises and individuals. Phase II 2006-2008 In June 2006, for the first time, a Shanghai branch of China Construction Bank was approved to lauch a forex option product requiring margin for individual investors, which was regarded as a sign by many that China was going to loosen its control over margin deposit in forex trading. Later in 2006, the China Construction Bank launched a 5:1 leveraged product called "Man Jin Bao", or "Full Gold Treasure", followed by a series of similar products released by other large banks such as Bank of China, China Minsheng Bank, and China Merchants Bank. It should be noted that the China Minsheng Bank was allowed to provide a maximum leverage of 30:1 for forex trading, attracting about 3000 new customers per month. It seemed that the time for forex margin trading has already come. Unexpectedly, the government suspended margin trading soon. In 2008, the China Banking Regulatory Commission issued a document, prohibiting all financial institutions which had already involved in forex margin trade from providing the business service to new customers and new transactions to existing customers. Since then, the forex margin trading was completely banned.The situation has remained unchanged for a very long time. Now many domestic invstors can only invest in forex products without any leverage offered by domestice banks due to national regulations and restrictions, waiting for one day in the future when they can have more free choices in the market.
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