MONEY LAUNDERING

China’s crackdown on underground banks uncovers illegal money transfers of more than US$125bn

Problem of illegal flows of ‘grey capital’, which has had impact on mainland’s foreign exchange management system, is spreading and still serious, People’s Daily newspaper reports

PUBLISHED : Friday, 20 November, 2015, 11:07am
UPDATED : Friday, 20 November, 2015, 3:48pm

China started a crackdown on underground banks in April and has so far uncovered more than 170 cases of money laundering and illegal fund transfers involving more than 800 billion yuan ($125.34 billion), mainland media reports.

Illegal flows of such “grey capital” have not only had an impact on China's foreign exchange management system, but also seriously disturbed the country's financial and capital markets order, the People's Daily , the Communist Party's official mouthpiece, reported on its website.

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Although the crackdown, launched jointly by China's police, foreign exchange regulator and the People's Bank of China, had made some progress, illegal activities of China's underground banks were spreading and the situation was still serious, the article said.

In one illegal money-transfer case - the biggest discovered in China so far - Chinese funds worth about 410 billion yuan (HK$500 million) had been transferred overseas using non-resident accounts, exploiting regulatory loopholes and bypassing oversight, it said.

China's central bank and foreign exchange regulator have also been moving to restrict channels by which money can legally leave the country, in order to keep the money supply stable and lower domestic interest rates to spur growth.

If Chinese companies and individuals continue to sell yuan to buy dollars, it reduces the amount of yuan available for lending and therefore puts increased pressure on rates.

Sources told Reuters on Wednesday that China had moved to restrict trade at offshore yuan clearing banks - stepping up capital controls even as Beijing positioned its currency for inclusion in the International Monetary Fund's reserve basket.

The IMF is set to decide whether to include the yuan at the end of the month.

IMF sources told Reuters that the yuan was likely to be included in the basket, but at a lower ratio than originally expected thanks to a change in methodology.

China's central bank and commercial banks bought a net 12.9 billion yuan (US$2.02 billion) worth of foreign exchange in October, data showed on Sunday, stemming heavy sales in the previous three months that underlined capital outflows.