Inside Asia: On China’s Border, Underground Banking Flourishes

ZHUHAI, China — In an underground mall just a stone’s throw from the Chinese 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 salesmen jostling to usher clients into the shops, where thick wads of bank notes — usually 100 renminbi, or about $16 — change hands and shuffle noisily through electronic cash-counting machines. Licensed as liquor and dry-goods stores, with shelves stacked with rice wine and cigarettes, many serve as underground bankers with remittance agents in back rooms.

“It’s very simple,” said one agent, Choi, who like others interviewed for this article would give only his surname because of the illicit nature of his business. “You give me renminbi here. Then we deliver Hong Kong dollars to you in Macau. We can move tens of millions each day.”

As the Chinese 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 that moves hundreds of millions of dollars’ worth of money each day. Much of that activity is conducted openly on the streets of 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 the 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 looser restrictions on capital transfers have 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.”

In Guangdong, 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 Chinese foreign trade — has served as a portal for capital flows since China’s economic opening three decades ago. Collectively, the cities are a hotbed of underground banking that also extends to Macau and Hong Kong. Macau, a gambling center, and Hong Kong, a global financial hub, are special administrative territories of China, with financial systems separate from the mainland’s.

In Zhuhai alone, more than 1 billion renminbi is transferred daily through underground networks, according to six agents who spoke to Reuters — part of a tight-knit group of some 100 agents operating in the border area. “Our business has gone up some 30 percent in the past three years,” said one agent, who gave his name as Li.

Besides retail-level agents clustered around the borders at Zhuhai, which is adjacent to Macau, and Shenzhen, which is adjacent to Hong Kong, there is another echelon of shadow bankers existing across Guangdong Province, 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,” said a Hong Kong businessman, Chan, who has run a factory in Guangdong for more than 20 years. “It was just a tiny room filled with bank notes. Can you imagine how much money there was? They’re everywhere. In every village, town and city.”

Global Financial Integrity, a Washington group that works to stop the cross-border flow of illegal money, estimated that $2.83 trillion flowed illicitly out of mainland China from 2005 to 2011, with Hong Kong the largest recipient.

Article source: http://www.nytimes.com/2013/05/21/business/global/on-chinas-border-underground-banking-flourishes.html?partner=rss&emc=rss