Police, prosecutors, as well as customs and financial regulators in China have joined forces to tackle all possible channels of capital outflow as Beijing scrambles to ensure the world’s second largest economy stays in the safe zone amid potential turbulence. Global markets tumbled on Tuesday after US Federal Reserve chair Jerome Powell said high inflation could persist until the middle of next year and that the US financial authority should consider speeding up the pace of its tapering of bond-buying stimulus. Chinese authorities have already pushed their battle lines to overseas casinos from the previous high pressure on the so-called ant moving home style of money transfer where small amounts are moved in hope of avoiding detection, as well as underground banking and bitcoin transactions. Last week, authorities arrested Alvin Chau Cheok-wa, head of Macau’s biggest casino junket operator, over his suspected involvement in running illegal cross-border gambling activities, signalling a determination to fix all possible loopholes. The ‘control’ mindset is still very much alive in the case of cross-border capital flows Edwin Lai “Some gamblers place huge amounts of bets, causing a huge outflow of funds,” Miao Shengming, head of the first prosecutor’s office at the Supreme People’s Procuratorate, said on Monday. “[Overseas casinos] reap huge economic benefits, and endanger our economic security.” As 1,376 of 13,329 overseas-related crimes prosecuted in the first nine months of the year involved casinos, Chau’s arrest is clearly indicative of Beijing’s more aggressive stance, analysts said. “If they see that there is too much outflow, maybe due to illegal means, they may tighten the grip of controls. This may be what is happening now,” said Edwin Lai, a professor of economics at Hong Kong University of Science and Technology. “The ‘control’ mindset is still very much alive in the case of cross-border capital flows.” China braced for US tapering, rate increases with Powell set keep top Fed job The State Administration of Foreign Exchange last week highlighted the risks concerning underground banking, including bogus transactions through shell companies, the refitting of sales machines, overseas cash withdrawals via bank ATM cards, cash trafficking and transfers through bitcoin and other virtual currencies. More than 70 underground banks have already been targeted this year, with one case in Gansu province leading to the arrest of 36 suspects involving as much as 75.6 billion yuan (US$11.9 billion). Tackling outflows through grey areas, which often go unreported on the balance of international payments, is viewed as important ahead of the upcoming leadership reshuffle. China will announce its latest major leadership reshuffle at a key party congress next year and Zhou Xuezhi, a researcher with the Institute of World Economics and Politics of the Chinese Academy of Social Sciences, believes the fight against gambling crimes will partly help outflows. Outflows won’t be a big problem in three to six months Zhou Xuezhi “All of them are preventive measures,” said Zhou. China is well positioned because of its reluctance to use big stimulus, capital control and economic fundamentals, according to Zhou, while the fact the yuan is currently strong against the US dollar indicates a low level of market panic. “Outflows won’t be a big problem in three to six months,” he added. Ding Shuang, chief Greater China economist at Standard Chartered Bank, said the demand from Chinese citizens for global asset diversification is increasing, but the government does not need to worry when inflows are strong. The government’s attitude is to encourage the flows through officially recognised ways, but firmly crack down on illegal channels Ding Shuang Beijing has implemented close-circuit capital market opening-up, with stock, bond and wealth management connect programmes as well as qualified foreign institutional investor schemes to manage money flows in and out of China. It saw a net inflow of US$149.3 billion last year, a reversal of the outflow seen in the previous five years. “The government’s attitude is to encourage the flows through officially recognised ways, but firmly crack down on illegal channels,” Ding said. The current US taper is reminiscent of 2015-17, when China had to burn through a quarter of its foreign exchange reserve to defend its currency. It also imposed strict capital controls and issued government orders to curb the “irrational investment” in overseas property, hotels, entertainment and sports clubs. Huang Yiping, a Peking University professor who advised the central bank during the 2015-17 turbulence, warned that economies with vulnerable financial systems, overvalued currencies, high government debt or bad economic fundamentals are particularly prone to US policy adjustments. “Our country could also face the pressure of currency depreciation, capital outflows and even a drop in asset prices,” he told an annual conference organised by Caijing magazine at the weekend. Guan Tao, chief economist at BOC International, expressed concern over the narrowed interest rate gap between China and the US given the divergence between American tightening and Beijing’s more towards a looser stance next year. “It will accordingly lower the attractiveness of yuan assets, reduce the inflows, or even trigger capital outflows,” he wrote in an article on Sina.com on Monday. China ‘must prevent reversal of capital flows’, former official warns While strengthening monitoring and risk-control capabilities, China should push forward with institutional opening-up by improving policy transparency and predictability to lure long-term capital, he suggested. The Chinese authorities have tried to shore up market confidence and manage expectations in the past several months, saying that they have adequate tools and are well prepared for potential headwinds. China holds the world’s largest foreign exchange reserves totalling US$3.2 trillion, while it remains a magnet for global investors due to its large market and financial opening-up. In a statement issued last week, China’s foreign exchange regulator pledged close cooperation with police, customs, taxation and other departments to actively unearth clues concerning illegal capital transfer activities. Particularly, they ordered banks and payment institutions to take more responsibility to identify violations, while also blocking loopholes.