Despite curbs, China's vast hot money triangle flourishes

ZHUHAI, China/HONG KONG: In an underground mall just a stone's throw
from China's teeming border with Macau, a row of 30 small shops with
identical golden plaques does a brisk, though shadowy trade with
mainland Chinese visitors, many of them bound for the gambling hub.
"Good
rates. Better than the banks," shout salespeople jostling to usher
clients into shops where thick wads of Chinese 100 yuan and HK$1,000
bank notes change hands and shuffle noisily through electronic
cash-counting machines. Licensed as liquor and dry goods stores with
stacked shelves of rice wine and cigarettes, many conduct their real
business in back rooms - as underground bankers and remittance agents.
"It's
very simple," said one agent surnamed Choi, dressed in sandals and
ripped jeans, as he served tea in a back office where larger
transactions are typically carried out. "You give me renminbi here. Then
we deliver Hong Kong dollars to you in Macau. We can move tens of
millions each day," he said, glancing up at six security camera images
of his shop front flickering on a flat-screen TV.
As China's
economy and financial markets mature and gain in sophistication, so too
does a vast underground banking industry offering swift, cheap and low
risk cross-border fund transfers - shifting hundreds of millions of
dollars each day. Much of that activity is conducted openly on the
streets of southern China's Guangdong province, where businesses and
individuals depend on underground networks to get around strict currency
controls - both for legitimate commercial purposes and to safeguard
assets beyond the reach of authorities.
Beijing is finding it
increasingly difficult to stem the tide of speculative and illegal cash.
In the decade since China began cracking down on money laundering, the
government has amended its criminal laws and strengthened commercial
banking rules, but loosening restrictions on capital transfers has made
it easier for hot money to be channeled across the border.
"China's
financial markets are not that mature," said Yu Yongding, an economist
at the Chinese Academy of Social Sciences and former adviser to the
central bank. "There are lots of capital controls that certainly have
contributed to these kind of activities, while corruption and money
laundering also play an important role."
UNDERGROUND BANKING TRIANGLE
In
affluent Guangdong in the Pearl River Delta, cities like Zhuhai,
Shenzhen, Guangzhou and Dongguan are major underground conduits for
Chinese hot money. The province, where imports and exports amounted to
$984 billion last year - a quarter of China's foreign trade - has served
as a portal for capital flows since China's economic opening over 30
years ago.
Collectively, the cities form part of a giant,
unregulated underground banking triangle between China, the world's
gambling capital of Macau and the global financial hub of Hong Kong.
In
Zhuhai alone, over 1 billion yuan is transferred daily through
underground networks, according to a straw poll of six agents who spoke
to Reuters - part of a tight-knit group of 100 operating in the border
area.
"Our business has gone up some 30 percent in the past three years," said one who gave his name as Li.
Besides
retail-level agents clustered around the borders at Zhuhai and nearby
Shenzhen, another deep-rooted echelon of shadow bankers exists across
Guangdong out of public view, often working from secret offices, with
deals conducted between trusted, well connected parties, often with just
a phone call.
"I went to see a friend in this business once. It
was just a tiny 100 square foot room filled with banknotes. Can you
imagine how much money there was?" said a Hong Kong businessman surnamed
Chan who has run a factory in Guangdong for over 20 years. "They're
everywhere. In every village, town and city."
The
Washington-based Global Financial Integrity group estimated about $2.83
trillion flowed illicitly out of China from 2005 to 2011, with Hong Kong
the largest recipient.
"The enormity of money laundering right
now is a problem," said a senior law enforcement official in Hong Kong,
who asked not to be named given the politically sensitive nature of his
comments as a public official. "Chinese banks in Hong Kong are basically
a black hole, even now."
Yan Lixin, secretary general of Fudan
University's China Centre for Anti-Money Laundering Studies, reckons
more than a third of the capital moving through underground banking
channels is dirty money being laundered. "According to the statistics
within my scope and my own experience, it's approximately 30-40 percent
at least," he said. "The situation is going from bad to worse."
Much
of the unofficial flows of capital into and out of the triangle of
Guangdong, Hong Kong and Macau, facilitate trade and investment in the
key economic region, businessmen say.
Illegal cross border bank
remittances can be used to wire extra capital into China to buy raw
materials or cover wages during peak periods. "It just takes 15 minutes,
but official approval can take two weeks," said an electronics factory
boss in Dongguan who often uses underground banks. He didn't want to be
named to avoid disrupting business ties with such agents.
Unlike
other shadow banking systems in eastern coastal regions like Zhejiang,
Jiangsu and Wenzhou that tend to collect deposits and extend high
interest loans to small businesses starved of credit, Guangdong's
underground banks tend to play the greatest role in black money
transfers abroad, says China's central bank.
A People's Bank of China (PBOC)
anti-money laundering report from 2007 said nearly one third of China's
illegal private banks originated in Guangdong. In 2009, police shut
down over 40 underground banks in Fujian, Jiangxi and Guangdong
provinces, according to a report in the official People's Daily,
involving 100 billion yuan. "Underground banks serve as an important
channel for money laundering and illegal foreign exchange desks," it
wrote.
In the most recent public statistics available, 970 money
laundering cases were investigated in China in 2009, involving 301
billion yuan. Guangdong was cited as a major blackspot.
RED FLAGS
China's
new leader Xi Jinping has pledged to crack down harder on corruption
and financial crimes like money laundering. The central bank issued new
anti-money laundering rules to financial institutions in December,
requiring them to rate clients' risks based on where they are and the
kind of business they do, people with knowledge of the rules have told
Reuters.
In an internal 2008 PBOC anti-money laundering report
leaked on the Internet, it said that since the mid-1990s, 16,000-18,000
Communist party officials, businessmen, CEOs and other individuals had
"disappeared, carrying about 800 billion yuan."
The government
controls capital inflows, bars underground banking and unauthorised
remittances, and limits individuals' capital outflows to 20,000 yuan a
day. Under Macau banking and gaming laws, alternative remittance systems
are illegal and suspicious transactions must be red flagged and
reported to the Macau Financial Intelligence Office.
Yet such capital flows flourish largely unchecked.
Part
of the difficulty for China has been figuring out how to control an
industry that provides a pressure valve for capital seepage as Beijing
mulls further capital account opening and full yuan convertibility. The
State Council, China's cabinet, has said it would issue an operational
plan this year to achieve full convertibility of the yuan and establish a
comprehensive system for outbound investment.
That may take some time, said Yu Yongding, the economist.
"China
has to solve so many problems. Capital account liberalization should
not be treated as a priority," he explained. "You shouldn't abolish laws
just because they're difficult to enforce."
Authorities also
don't want to quash an industry that's funneling credit to smaller
firms, said Yan of Fudan University, whose centre is approved and
supported by the PBOC's anti-money laundering bureau. Punishing
underground banks may be at odds with local governments wanting
development and stability.
"Crackdowns will impact the local economy," said Yan.
MACAU'S CASINO "BANKS"
"There's
always a gap in China between policy and practice," said one
businessman in Zhuhai who deals regularly with Chinese officials. He did
not want to be named because of the sensitivity of the issue. "If they
shut down the money changers, others will just crop up elsewhere.
They're too smart."
Writing a six-digit VIP account number on a
piece of paper, a remittance agent in Zhuhai said clients could use this
to withdraw funds in chips or cash from most casinos in Macau, which
raked in $38 billion in annual gaming revenues last year, fuelled by
cash-rich Chinese gamblers.
"It operates like a bank. You can take money in and out at any time," Li, the remittance agent said. "It's safe."
In
a high-roller VIP suite at a major casino in Macau where baccarat
tables were placed between two giant aquariums filled with bright reef
fish, people queued at six counters, some holding slips of paper with an
account number and a monetary amount written on them.
One man,
in a grey hoodie, holding such a slip, handed over his passport and was
given a stack of eight, oblong HK$500,000 gambling chips. He didn't have
his own account, he said, but had arranged the transfer through a
remittance agent.
"In peak periods you can always see some
mainland Chinese bringing maybe 1 or 2 million yuan in cash ... taking
the lift to the 20th floor and then taking Hong Kong dollars back down,"
said a Macau-based academic specialising in VIP room operations, who
asked not to be named given the fear of reprisals by powerful figures in
the highly lucrative industry. "This only happens when they feel
comfortable with the environment. That's something that is quite
common."
Typical VIP rooms in Macau run by junkets - middle men
who bring in Chinese punters and extend credit - maintain cash reserves
or working capital of at least 100 million yuan, the academic said, with
cash transfers tending to take place in hotel rooms or outside, away
from surveillance cameras.
Choi said he and other Zhuhai agents
regularly transfer millions of yuan directly into VIP room gambling
accounts in Macau casinos. Bank wire transfers can also be arranged,
though larger amounts would need to be staggered over a week, with a
maximum of 500,000 yuan daily to reduce the risk of detection.
"There
must be a lot of money laundering," said Choi. "But we're not criminals
... We're just making life more convenient for people. We just move the
cash."