Daily Management Review

$148 Billion Underground Bust Seen in China Capital Flow Crackdown


$148 Billion Underground Bust Seen in China Capital Flow Crackdown
According to a newspaper published by China’s central bank, the country’s currency regulator bust underground banking operations that involved more than 1 trillion yuan ($148 billion), as a part of China’s campaign to crack down on illegal capital outflows.
The Financial News reported Thursday, citing Zhang Shenghui, an official at the regulator, said that as part of the nationwide checks on illegal outflows, the State Administration of Foreign Exchange also seized $8.43 billion in foreign exchange funds.
The news underscores both the determination of authorities to restrict outflows that put pressure on the nation’s currency and trigger even greater capital flight and the desire of Chinese to diversify money out of their country. Since the People’s Bank of China’s mini-devaluation in August last year, the yuan has depreciated 7.8 percent against the U.S. dollar. It has fallen 1percent this month alone.
"As regulators tighten the formal channels, underground activities seem to be heating up," said Raymond Yeung, chief greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong.
Disorderly declines in the yuan, including through ramping up offshore yuan borrowing costs in Hong Kong, and heading off would be tackled the hard way, China has repeatedly shown. Faking trade invoices, camouflaging tourist spending abroad and turning to life-insurance policies in Hong Kong are some of the creative methods that Chinese investors determined to squirrel money out have resorted to. The demand to get money into other currencies is also pointed out by the declining yuan deposits in offshore banks.

Amid ongoing demand for foreign currency, capital outflows could be larger than anticipated, a flurry of investment banks have recently warned. As economic growth slows and the yuan weakens, outflows will intensify in the next few months, expects Deutsche Bank AG.
Since an increasing amount of capital is exiting the country in yuan rather than in dollars, outflows may be larger than they look, Goldman Sachs Group Inc. analysts have estimated.
Official data show that $27.7 billion in yuan payments left China in August even while lenders’ net foreign-exchange purchases for clients have fallen close to a one-year low and China’s currency reserves have stabilized. In comparison in the five years through 2014, the monthly average was $4.4 billion. According to MK Tang, Hong Kong-based senior China economist at Goldman Sachs, such large cross-border moves need to be taken into account when measuring currency outflows and can’t be explained by market-driven factors.
According to Iris Pang, senior economist for greater China at Natixis SA in Hong Kong, from $133 billion in the previous three months, illicit flows could have increased to $246 billion in the third quarter of 2016.
"Some outflow channels are blocked but that doesn’t block demand. New grey and black markets may emerge," said Pang.
The Financial News reported, without naming the lenders that after three banks failed authentication checks, SAFE suspended foreign-exchange settlement and sales at those banks earlier this year. According to the newspaper, oversight against underground banks and other foreign-exchange violations would be strengthened by the regulator.
China would step up monitoring of cross-border capital flows, said Pan Gongsheng, head of the foreign exchange regulator and also a deputy central bank governor in July.