UNDERGROUND BANKING
Across The Border
by

Crackdown on underground banks intensifies as concerns over outflows increase

The State Administration of Foreign Exchange (SAFE) has uncovered 56 illegal banking cases involving more than one trillion yuan, according to an official

PUBLISHED : Sunday, 23 October, 2016, 3:40pm
UPDATED : Sunday, 23 October, 2016, 10:06pm

The latest statement from a mainland official about the intensity of the authorities’ crackdown on underground banks suggests that worries about currency outflows are growing.

On Thursday, the state-owned China Financial News published an interview with a senior director at the State Administration of Foreign Exchange (SAFE), Zhang Shenghui, in which Zhang said that as of September 9 this year the agency, in collaboration with public security bureaux, had uncovered 56 illegal banking cases involving more than one trillion yuan.

Denis Suslov, an analyst at Shanghai-based financial industry consultancy Kapronasia, says that while SAFE have been trying to stop illegal capital outflows for a while, this crackdown “seems to be more intense than before, mostly because of the rising outflows”.

What is new is that [people] are now much more aware of the available ways to move capital abroad
Denis Suslov, analyst, Kapronasia

“Concerns from both the middle classes and high-net-worth individuals about yuan depreciation have been building up for a while now, but what is new is that they are now much more aware of the available ways to move capital abroad,” said Suslov.

Judging by Zhang’s statements, Chinese citizens seem to be making use of this knowledge, and this is a worry for China’s authorities who have been concerned about the amount of capital leaving the country by both legal and illegal means, particularly since the sudden devaluation of the yuan last August.

While each Chinese citizen is permitted to buy up to US$50 000 of foreign currency each year, there are reports that this has become more difficult to achieve in practical terms.

Suslov says that the classic ways of moving money out of China illegally include fake trade invoices and disguised card spending abroad though new methods are emerging, such as buying insurance policies in Hong Kong.

“A high-profile interview is a good way to send out a message to those considering using illegal channels to move money abroad,” says Suslov.

Zhang also revealed in his interview that in April SAFE had found that three banks did not have appropriate audit arrangements in place for foreign currency exchange, for which they had been suspended from trading for six to nine months. SAFE also confiscated 4.8 million yuan of illegal gains from the banks, and imposed a fine of 2.3 million yuan, he said.

Hong Kong is a popular route for those seeking to move money out of the mainland illegally, and this is reflected in a southern focus in the crackdown on illegal banks. Zhang said that 19 of the illegal banks shut down were in Guangdong, and a further eight were in Shenzhen.

Currency devaluation to boost the contribution from net exports to GDP provides little value
Eddie Chung, strategist, Standard Chartered

On Friday the Chinese currency reached a new six-year low against the US dollar, trading at 6.76 yuan to the dollar, though it is holding its value against other major currencies. However, Standard Chartered foreign exchange strategist Eddie Chung wrote in a report that he did not expect further sustained depreciation, despite some potential benefit to exporters.

“Currency devaluation to boost the contribution from net exports to GDP provides little value and risks fuelling capital outflows and intensifying macroeconomic risks,” he wrote, noting that the authorities were focussed, in the near term at least, on these latter two considerations.

Not all agree, however, and analysts at Bank of America Merril Lynch led by Claudio Piron wrote in a report that they anticipate the yuan to fall further and trade at 7.00 against the dollar at the end of this year, and depreciate further in 2017.

“We think the Chinese government will allow further CNY weakness as the only means for policy easing in the near future. It is also a natural choice as the central bank yields to more pressure from capital outflow,” they wrote.