Along a narrow lane in Hong Kong's Western district sits a clutch of money changers doing more than swapping banknotes for tourists. They are quiet channels of illicit 'hot money' that flows between the mainland and Hong Kong.
Today, a young investment banker is visiting the lane for the first time to do a deal that will skirt the mainland's tight capital controls and, the banker hopes, pay off big time. The 28-year-old mainlander, identified only by his family name of Li, plans to wire about HK$300,000 to his bank account in Beijing and then invest the money in stock market index futures. Li figures he can reap an annual gain of roughly 9 per cent from his bets, bringing him closer to his goal of having the seed capital to set up his own hedge fund on the mainland.
Hot money travels across the border in various ways, from suitcases to doctored trading invoices. Li is part of a groundswell of individuals in Hong Kong opting to move cash through local money changers, many of whom also act as remittance agencies, handling two-way trade and mimicking the hawala banking networks that operate in South Asia and the Middle East.
In Hong Kong, some people use remittance agencies to wire funds to the mainland to buy a house, or support their elderly parents, or bet on investment products. Conversely, individuals on the mainland use them as conduits for capital flight, fuelled by worries over the outlook for the Chinese economy. All the activity is drawing unwanted attention from the mainland's regulator, the State Administration of Foreign Exchange. According to a recent Safe report, the regulator cracked down on 210 underground remittance agencies on the mainland involving more than 100 billion yuan (HK$122 billion) from 2007 to 2011.
On the mainland, 'underground remittance agencies not only violate foreign-exchange regulations, they also undermine macro-governance of China's financial markets and have created avenues for tax evasion and money laundering which are hard to monitor and control', says Patrick Phua, a Beijing-based partner specialising in financial services and regulatory issues at Australian law firm Mallesons Stephen Jaques.
Peng Jian, director of the Beijing Huahuan Law Firm, says individuals who use their services are usually fined at most 30 per cent of the violation amount, and typically don't face jail time. But the remittance agencies risk being charged with 'engaging in unauthorised foreign exchange business' and 'evasion of foreign exchange restrictions', and risk severe punishment such as five years or more in prison, he adds.