During the november 2015 China said it cracked the nation’s biggest “underground bank,” which handled 410 billion yuan ($64 billion) of illegal foreign-exchange transactions, as the authorities try to combat corruption and rein in capital outflows that have hit records this year.
More than 370 people have been arrested or face lawsuits or other punishment in the case centered in eastern Zhejiang province, the official People’s Daily reported on Friday, citing police officials. The case brought the total for underground banking and money-laundering activities to 800 billion yuan since April, the newspaper said.
The probe began in September 2015 the police took almost a year to sort through more than 1.3 million suspicious transactions, the state-run Xinhua News Agency reported separately.
The authorities froze more than 3,000 bank accounts, Xinhua said.
The tactics used by Chinese citizens to defeat the controls include so-called smurfing, where large sums are moved by breaking them down into a series of smaller transfers using the bank accounts and foreign-exchange quotas of a range of individuals.
In the Zhejiang case, a suspect identified as Zhao Mouyi used a different method, setting up more than 10 companies in Hong Kong from 2013 and transferring more than 100 billion yuan through so-called non-resident accounts, which are used by offshore companies in China when they are transferring money abroad, according to the newspaper’s report.
aking advantage of a “loophole” relating to non-resident accounts — which has since been filled by banks — Zhao circumvented the capital controls by directly transferring yuan overseas and then exchanged the money into foreign currencies at banks including HSBC Holdings Plc in Hong Kong, the People’s Daily said. Zhao then allegedly transferred it to his clients’ accounts, the report said, citing the local police.
HSBC declined to comment on the report. The Hong Kong Monetary Authority also declined to comment on the specifics of the case, while saying that banks in the city have “stepped up their internal controls to report suspicious transactions.”
Methods of bypassing China’s currency controls include:
- making transfers using Hong Kong money changers
- carrying checks from underground banks across the border to Hong Kong
- smuggling cash through customs
- making payments abroad using credit or debit cards and then returning merchandise for cash
- getting an overseas mortgage based on savings held within China
The underground banking crackdown is “an attempt to reduce the capital outflow pressure,” said Hou Wei, a banking analyst at Sanford C. Bernstein & Co. in Hong Kong. The government is “determined and very serious” about defending its currency reserves and the exchange rate, the analyst said.
In another case highlighted by the People’s Daily on Friday, an investigation of an underground bank in Fujian this year uncovered a network spanning Hong Kong, Taiwan, Australia and Saudi Arabia — and a senior executive at a state-owned enterprise who allegedly tried to move 18 million yuan abroad, the newspaper said.
The authorities have made a series of moves to control legal and illegal capital flows, including capping withdrawals at overseas automated teller machines.
The People’s Bank of China has given verbal guidance to onshore lenders to stop offering cross-border financing to offshore banks, people familiar with the matter said this week. The monetary authority has also told overseas banks to halt onshore bond repurchases, two of the people said.
Today Chinese regulators have warned bankers against shifting domestic currency out of the country; the Financial Times reported citing its sources.
The move is part of the Chinese government’s strict new capital controls regime.
According to people familiar with the matter, the new rules introduced this month require banks in Shanghai to ‘import’ 100 yuan for every 100 yuan transferred overseas. Such measures are expected to ensure there will be no net outflows of the Chinese currency. Previously banks had been allowed to remit 60 yuan abroad for every 100 yuan they brought back into China.
Beijing-based banks have been ordered to import 100 yuan for every 80 yuan they remit overseas on behalf of clients, the sources added.
“This regulation is a bigger nightmare for foreign banks because we are more reliant on cross-border business than Chinese banks,” an unnamed banker told the FT.
Bankers said the central bank and State Administration of Foreign Exchange (Safe) were explaining the regulations over the phone and meetings. Safe has instructed not to inform clients why their overseas remittances are being stopped. The administration is checking net yuan flows on a weekly basis, rather than the previous monthly returns, bankers said.
Chinese yuan’s rapid depreciation against the US dollar has prompted the government support measures, including the sale of the country’s foreign exchange reserves. Authorities introduced strict capital controls after forex reserves fell to the lowest level in over five years in October. The reserves dropped $45.7 billion to $3.12 trillion.
Beijing’s desire to internationalize the yuan by encouraging companies to use it for trade transactions, shareholder loan repayments, and dividend remittances was also one of the reasons for tighter capital controls.
“Chinese importers are having trouble paying trade invoices denominated in renminbi,” FT sources said.
Data from Beijing’s policy researcher NSBO showed net renminbi outflows exceeded 265 billion yuan ($38.5 billion) in September but have since plummeted due to regulators’ measures. “The use of yuan for foreign transactions, which had been used to evade capital controls, dropped sharply [in December] to its lowest level since September 2015,” said NSBO.