• Thu
  • Aug 21, 2014
  • Updated: 9:52am
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INVESTMENT

Mainlanders use ‘free money’ from Hong Kong banks to earn higher returns at home

Illegal methods employed to move low-interest tax loans to the mainland to take advantage of wealth management products' higher rates

PUBLISHED : Wednesday, 26 February, 2014, 9:34am
UPDATED : Thursday, 27 February, 2014, 12:42am

Mainland Chinese working in Hong Kong have found a way to use “free money” from local banks to invest in profitable financial products across the border.

They take advantage of cheap personal loans aggressively hawked by banks in an attempt to expand their business. The borrowers quietly turn around and invest the cash on the mainland for higher returns.

Given the big gap in interest rates between Hong Kong, which has a market-based banking system, and the mainland, where the central bank tightly controls loan and deposit rates, it’s no surprise that some are able to exploit the opportunity for arbitrage.

One practical difficulty remains, however, for these individual investors – how to transfer the money to the mainland? Sometimes they have to do it illegally. Chinese citizens are legally allowed to transfer up to US$50,000 per year into the mainland. Violators face fines or criminal prosecution.

The annual tax season in Hong Kong provides an opportunity for investors to obtain the cheap cash from local banks in the form of loans ostensibly to help them pay off their taxes.

Transferring money through underground banks – this practice is illegal
JIANG RONGQING, LAWYER

Robin Wang, a managing director in the Hong Kong office of a major Chinese state-owned enterprise who earns more than HK$2 million a year, faces an eyebrow-knitting tax statement every year.

This year, he learned something new from his friends about how to make profitable use of his tax filing – submit the statement to a local bank and apply for a tax loan at a very low rate, in some cases less than 2 per cent per year.

Wang, who spoke to the South China Morning Post on condition that his real name not be used, said he could borrow up to 10 times his salary from one of the major local banks, although he does not, in fact, need the loan to pay his taxes.

“For me, this means ‘free money’, so why not?” he said.

Wang said instead of using the loan to pay his tax bill, he transferred the cash – after converting it into yuan – to the mainland through underground money agencies in Sheung Wan.

Once the cash reached his mainland bank account, he could sit back in Hong Kong and place orders online for short-term investments.

These are typically wealth management products, mostly offered by trust companies. They mature in three to six months and offer an annualised return of at least 6 per cent. They are part of the mainland’s shadow banking business, the regulation of which has been a growing headache for Beijing.

Wang said that with part of the returns he earns on these investments, he was able to quickly repay the tax loans.

Jiang Rongqing,  senior partner at Dacheng Law  in Beijing, said the practice carried a number of risks.

“Transferring money through underground banks – this practice is illegal itself, because those banks totally avoid the settlement of exchange,” said Jiang. “Also, this transaction is not secure at all.”

“The government bureaus often focus on companies conducting illegal transactions but ignore individual practice. If it is a big amount, violators will be subject to criminal charges.”

Once the cash gets into the mainland banking system, some investors may also pour the money into the red-hot property market, where they can put a down payment on a flat financed at the cheaper offshore borrowing rates.

In an interview with the Post, a Hong Kong-based mainland business executive, who only wanted to be identified as Mr Su, said he recently made the down payment for his new flat in Zhongshan,  Guangdong province, with part of his tax loan from a local bank.

Su said he had the financial strength to repay the loan, since his job paid well.

“I don’t see it as a problem for both the Hong Kong and mainland banking system,” Su said.

“As a borrower, I will repay my loan to the Hong Kong bank on time. As a property buyer, I make my down payment in cash. No one asks me where the money comes from, and I don’t think anyone should ask.”

Wang said the availability of low-interest personal loans in Hong Kong is widely known among mainlanders.

“I don’t see anything wrong with [borrowing in Hong Kong and investing in the mainland]. This is what we are entitled to, because this is how the two different systems work,” Wang said.

“The only risk may happen in the money transfer process, given the dodgy nature of those underground banks, but if you think about the low-rate loans you can get in Hong Kong, it is too compelling [an opportunity to ignore].”

Customer service staff at major Hong Kong banks from HSBC to Bank of East Asia said they were aware of the loophole and that some of those taking out tax loans might not really use the money to pay their taxes. But they said the banks have no control over how the borrowers spend their money.

For the 2013/2014 tax year, many banks started promoting tax loans in October, with a monthly flat rate ranging from 0.12 per cent to 0.17 per cent.

After taking into account all fees and promotional discounts, a borrower usually pays an annualised interest rate of 1.7-2.6 per cent.

The larger the loan a borrower applies for, the lower the interest  rate. For example, HSBC charges 1.7 per cent interest for smaller tax loans, but if the amount exceeds HK$100,000, the rate drops to 1.4 per cent.

On the mainland, the benchmark interest rate set by the People’s Bank of China, the central bank, is 6 per cent for one-year loans. It rises to 6.55 per cent for loans of more than five years.

Follow the SCMP reporters on Twitter: @keiralulu and @george_chen

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This article is now closed to comments

brittany.lay.58
hmm
375parkav
george, seriously???? all my hongkong friends are doing this, and you just figure it out? do you know arbitrage has been there for centuries?
meoii
Looks like SCMP is running out of pitches, and wait...it took two reporters to write this piece! First of all, low interest rates are not only limited to mainlanders (as pointed out by other readers). Secondly, it's making peanuts compared to other revenue sources. Thirdly, low interest tax break loans are correlated to taxable income, to get a sizeable loan worth while you need to be making millions anyways. That puts a cap on most of us.
horacejeffry
Isn't this what the big banks all over the world have been doing themselves? Getting cheap money from the Government through QE 1,2,3 at nearly zero rates and then borrowing it back to the government at inflated rates from bonds Do this with billions/trillions USD per year and those few percents make you loads of money and hey you look like you have been performing very well through hard work and smart moves as a banker as where basically in co-operation with the government you have been stealing from the tax payers. But what do you care just give yourself another multimillion dollar bonus and a nice raise Bankers, should be spelled with a W instead of a B
m2leung
Maybe it is time that Hong Kong actually becomes a free economy by letting its currency off its peg so that the markets can determine the interest rate.
More good than bad will come out from the unpeg. Our interest rates will be market determined, which should deflate the property bubble. The purchasing power of mainlanders in HK will not increase year after year, which will also take the edge off the property market and reduce the number of mainland travelers coming to HK for shopping. The real value of the HK dollar is suppressed by the peg, so the increase in the HKD will fight off inflationary pressure, as we import almost everything from China.
Yes, the financial sector will take a big hit and the stock market will be subject to more volatility. But we should care about the entire Hong Kong, not cater to the few bankers and market speculators.
Camel
This is an old story. It is no secret that when you borrow money from Hong Kong banks with nearly zero interest (just handling charges) to put to banks or funds somewhere else with higher interest and profit income. Not only Mainlanders but also HKners and Expats who possesses a bank account in Shenzhen are doing this for years. It is just a matter between the banks and the borrowers and the banks are free to approve or reject loan requests. Actually they are eager to give away their money. And of course how skilled you are in handling finances.
anthonygmail
This report is a bit late isn't it? They have been doing this for the past 5 years or so. Maybe the reporters should ask around what goes on in the HK branches/subsidiaries of mainland banks.
Dave196358
what about the currency risk? Yuan has just devalued significantly in the past few days....seems some risks have been ignored.....sounds like the old swiss bank loans of the 1980's which ended in many people having to repay twice what they borrowed in their own currency........Another disaster waiting to happen.
 
 
 
 
 

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