The View | Local bankers, Chinese money laundering, and the growing risks

Players will always be playing. It’s most evident at the Four Seasons’ Lounge where almost all the diners speak only Mandarin. They are meeting with their private banking relationship managers, many of whom I recognise.

It is an appropriate setting for my coffee with a senior manager at a global asset firm, where I confirm how current strategies in mainland China’s money laundering, or capital flow, or portfolio diversification - whatever it is called in discreet banking circles - has inflated a financial bubble in Hong Kong that could be as catastrophic as the 2008 mini bond and accumulator crisis.

Chinese authorities have tightened up on the outflow of the yuan not only to combat high level corruption, but to prevent currency imbalances. Luckily, China still operates a relatively closed capital account and the movement and exchange of yuan is rigorously monitored and approved through authorities like SAFE (State Administration of Foreign Exchange) and the PBOC (People’s Bank of China).

Here is how the “turn” works. A mainland client has millions or billions in yuan sitting onshore in China. He needs to move it cleanly without resorting to “smurfing”- a series of small transfers that take too much time, or the unsavoury task of transporting cash.

His private banker instructs the Chinese client to deposit the yuan in a designated onshore account (in China) under the control or custody of the bank. At the same time, the bank lends them an equivalent US dollar amount, usually geared up, and deposits it in an offshore (outside of China, most likely in Hong Kong) account (minus a fee).

The transaction is based on the client agreeing that the US dollar funds will be used to buy third-party or in-house asset management products. So these proceeds are usually channelled to buy US dollar fixed income products (minus another fee).