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
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
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.