Monday, 29 May 2017

China Names and Shames Outrageous Capital Outflows

People and companies have creative ways to get money out of China
The State Administration of Foreign Exchange (SAFE) in China has uncovered some creative ways people and companies are moving money out of the country.

It released a list of 10 top covert cases, naming and shaming five companies, accusing them of forging contracts or invoices to remit a combined US$226 million offshore since 2015.

One of the alleged offenders was Ningbo Big Fortune International Trade, which SAFE claimed colluded with several overseas companies, forged trade contracts, inflated prices to 5-20 times the market price, and moved US$119 million overseas between August and September 2015.

The Chinese government is still trying to stem capital outflow
As a result the company was fined 22.8 million yuan for "seriously disturbing foreign exchange market order".

Sounds intense if the withdrawals disturbed "foreign exchange market order"...

There were five individuals who were also fined for moving up to US$4.35 million through underground banks to their foreign accounts.

In one case, a Guangdong resident enlisted 84 people to use each of their US$50,000 annual foreign exchange purchase quota to remit US$4.35 million to his own accounts in Australia and Hong Kong from December 2015 to January this year. He was fined 1 million yuan, according to SAFE.

But how else is someone supposed to move money overseas if they want to buy property or a company when they have the money? It's not like he stole it, though getting 84 people to help out is excessive.

Beijing continues to be concerned about capital outflows and regulators are discouraging companies from too much outbound investment and tightening checks on people exchanging foreign currency.

The extensive impact has led to the devaluation of the yuan
From July 1, the government will also tighten rules for banks to report cross-border customer transactions to curb money laundering and funding terrorism. That's a good cover to try to stem money from flowing out -- but will it?

Li Youhuan from the Guangdong Academy of Social Sciences, said capital outflow was undeterred by stricter scrutiny "given the robust business I've seen by underground banks".

"Measures to hold back company transactions definitely cannot work," he said. "Such demand cannot be eliminated as long as China opens its door to trade and exchange with other countries."

Finance professor Zhao Xijun at Remin University seems to think SAFE is sending a message of punishment, that financial institutions will be held responsible if they collude.

However, Andrew Collier of Oriental Capital Research says it's impossible to stop capital outflow altogether because companies need to conduct external transactions.

"I expect China will need to depreciate the currency in 2018 to reduce the pressure on capital flows," he said.

Will that be when US President Donald Trump will brand China as a "currency manipulator"? China seems to have too many domestic financial problems of its own to worry about what The Donald says...


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