Across The Border

Beijing’s latest crackdown on capital outflows may just make things worse

Analysts say the new curbs on buying insurance products in Hong Kong could prompt mainlanders to seek out unregulated channels to transfer their cash abroad

PUBLISHED : Tuesday, 01 November, 2016, 3:28pm
UPDATED : Tuesday, 01 November, 2016, 10:04pm

Beijing’s latest efforts to crack down on capital outflows by making it harder for mainlanders to buy insurance products abroad are unlikely to make much difference, according to analysts and industry insiders.

They argue that the new measures might even worsen the problem by prompting mainland residents to transfer cash abroad through alternative underground channels.

State-run media reported on Monday that China’s insurance industry regulator had recently launched a probe into illegal sales of Hong Kong insurance products on the mainland.

That followed an announcement over the weekend that state-backed UnionPay, the mainland’s biggest bank card provider, had banned customers from using its services to buy investment-related insurance products in Hong Kong with immediate effect.

UnionPay bans mainlanders from using card to buy insurance investment products in Hong Kong

The authorities had already capped insurance purchases overseas using UnionPay cards at the equivalent of US$5,000.

“The mainland authorities want to tighten further capital controls,” said Bernard Chan, the president of Hong Kong-based Asia Financial Holdings and Asia Insurance.

“We are seeing an explosive growth in Hong Kong’s insurance sales to mainland visitors. I’m talking about more than double-digit growth, which is not normal.”

[The new measures] may be counterproductive by prompting more outflows through unregulated channels where outflow may not be as effectively blocked
Goldman Sachs analysts

Mainlanders have been pouring in to Hong Kong to buy insurance products as a way of skirting Beijing’s strict capital controls and transferring money out of the country. Although China imposes an annual limit of US$50,000 or equivalent for each individual to convert from yuan, overseas foreign currency purchases through UnionPay cards are exempt from the cap.

Chinese buyers have been free to swipe credit or debit cards issued by UnionPay at Hong Kong-based insurers when they purchase large life insurance policies denominated in foreign currency. UnionPay then deducts the equivalent amount of yuan from their mainland bank accounts.

Premiums on these policies can range from US$50,000 to above US$1 million.

Buyers can then immediately cash in their new insurance policy at certain banks, receiving a loan worth of up to 80 per cent of the policy’s face value. They also have the option of cancelling the policy within a short time period in return for a cash refund.

But analysts from Goldman Sachs doubt how effective the authorities’ new curbs on insurance purchases may be in slowing the capital outflow, and fear it may instead make things worse.

“The move is unlikely to reduce FX outflow by a significant amount, in our view,” said Goldman analysts in a research note.

On the one hand, they said total premiums paid by mainlanders for Hong Kong insurance products were “relatively modest” in the first half of the year compared with the total outflow from China during the same period.

Moreover, the new measures risked “public misinterpretation of policy intent” and could “potentially be counterproductive by prompting more outflows through unregulated channels where outflow may not be as effectively blocked,” they said.

For example, “a much larger amount of stealth outflows in China is likely to have been facilitated by trading companies who maintain part of their net export proceeds offshore, possibly without the required reporting or documentation.”

An insurance sales agent in Hong Kong, who asked not to be named because of the sensitivity of the issue, agreed with Goldman’s assessment.

“I don’t think the restriction could work in preventing mainland money leaving the country,” she said. “It might instead drive the panic. You know, there are a lot of alternative methods to bypass the capital controls and people are inventive.”

We are seeing an explosive growth in Hong Kong’s insurance sales to mainland visitors
Bernard Chan, president, Asia Financial Holdings

Purchases of insurance products by mainland visitors in Hong Kong hit HK$30.1 billion in the first half of 2016, up 116 per cent compared with the same period last year, according to recent statistics from the city’s insurance regulator. The figure was almost equal to 2015’s total amount of HK$31.6 billion.

“A lot of them [mainlanders] consider the Hong Kong insurance more as an investment product, in order to hedge against the yuan’s depreciation risk and move money offshore,” Chan said.

In October, the currency’s depreciation became more pronounced, falling 1.7 per cent versus the US dollar.

In the same month, China’s foreign currency reserves may have fallen by around US$40 billion, following a drop of US$19 billion in September, due to “both capital outflows and negative valuation efforts”, said Larry Hu, China economist for Macquarie Research.

According to the latest estimates by Goldman Sachs, China’s foreign exchange outflows may have accelerated to close to US$80 billion in September and maintained the same pace in October, given that the yuan’s rapid fall against the dollar.

Chinese people have used myriad illicit methods to evade the strict limits on outflows and disguise money transfers, including underground banking, fake trade deals, service transactions, and mergers and acquisitions.

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