China must come clean on capital transfers abroad | South China Morning Post
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  • Feb 27, 2015
  • Updated: 7:01am

Bank of China

Bank of China is one of the big four state-owned commercial banks of the People's Republic of China – the other three are Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank of China. Bank of China was founded in 1912 to replace the Government Bank of Imperial China, and is the oldest bank in China. From its establishment until 1942, it issued banknotes on behalf of the Government of the Republic of China along with the "Big Four" banks of the period: the Central Bank of China, Farmers Bank of China and Bank of Communications. Although it initially functioned as the Chinese central bank, in 1928 the Central Bank of China replaced it in that role. Subsequently, BOC became a purely commercial bank.

CommentInsight & Opinion

China must come clean on capital transfers abroad

PUBLISHED : Tuesday, 15 July, 2014, 5:09am
UPDATED : Tuesday, 15 July, 2014, 8:45am

Contrary to what you would expect under the mainland's tight capital controls, an outflow of Chinese money is fuelling Western asset markets, especially for property, which suggests investors must be circumventing the regulations. Indeed a recent report by state broadcaster CCTV accused the Bank of China, one of the country's five biggest state-owned commercial banks, of effectively offering a money-laundering service to wealthy clients by helping them siphon cash out of the country.

The bank responded that the report was based on a "biased understanding" of its Youhuitong money transfer service, part of an experimental but legal pilot scheme launched in 2011. As has been reported since, such a trial to help top-end private banking customers transfer capital easily out of the mainland does have central bank approval. The real issue is therefore the integrity of the client and whether bank officials confirm that the money is "clean".

Because the mainland's media regulator recently banned critical reporting of major government institutions without approval, the CCTV broadcast of such detailed and serious accusations prompted speculation that it had high-level clearance and was a signal that the leadership is set to shake up the financial and banking sectors. But it may reflect serious division between conservative and progressive circles within the banking sector about how far banking reform should go.

Even though the capital transfer service has official blessing in this case, the illegal outflow of funds remains a problem. It is a service provided by state-owned banks that is popular among rich emigrants for moving money out. It is also popular with corrupt officials for laundering ill-gotten gains.

On the surface China does have tight currency controls, but there are many ways to circumvent them, including underground banking syndicates in Guangdong and elsewhere that can move money very quickly. The government should crack down on abuse of capital controls, whether through shadow banking or official institutions that ought to be beyond reproach. At the same time, China's opening up and integration with the rest of the world means that honest people increasingly have valid reasons for transferring capital quickly with a minimum of red tape. While not relaxing their vigilance against money laundering, the authorities should also smooth the path for legal transactions.

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