As Trade Tensions Simmer, Chinese Regime Warns Citizens Against Excessive Capital Outflows

A staff member counts money at a branch of the Bank of China on August 10, 2011 in Lianyungang, Jiangsu Province of China. (VCG/VCG via Getty Images)

China’s wealthy elite are devising new ways to shift their assets abroad, according to a recent announcement by China’s foreign exchange regulatory agency.

As U.S. trade negotiations ended earlier this month with no reached agreement, the yuan’s value dropped to a four-month low against the U.S. dollar.

When the yuan depreciates, the rich see their coffers losing value. Previously, wealthy Chinese individuals’ attempts to move their money overseas en masse were stymied by the Chinese regime’s restrictions.

This is because massive capital outflows can have damaging effects on the economy: drying up liquidity, weakening currencies, depleting reserves, and increasing the costs of borrowing.

With the recent escalation in trade tensions and no compromise in sight, the Chinese regime may have anticipated that the wealthy are nervous about their earnings getting depreciated and thus, try to move money out.

On May 19, China’s State Administration of Foreign Exchange (SAFE) publicized 17 cases of foreign exchange violations, detailing how banks, corporations, and individuals were punished for transferring assets overseas beyond the authorities’ allowed limits.

Punishment

Under Chinese regulations, each Chinese citizen is only allowed to send $50,000 worth of money overseas every year.

Many would skirt around this monetary limit by asking friends or relatives to send money on their behalf.

But in January 2017, as the yuan kept depreciating, Chinese authorities outlawed this practice, making it illegal for anyone who exchanges or sends foreign currency on another’s behalf. In addition, authorities forbade purchases of foreign exchanges for buying real estate or making investments in securities overseas.

According to China’s State Administration of Foreign Exchange, the total fines for the latest batch of violators added up to 84.44 million yuan ($12.23 million).

For the corporate violators, their illegal fund transfers were conducted between 2016 and 2018, while the individuals’ violations mostly occurred between 2014 and 2018.

Among them, a multi-millionaire in Zhejiang Province surnamed Hong transferred 312 million yuan ($45.18 million) through an underground bank, then exchanged yuan into a foreign currency to purchase real estate overseas. This amount was the highest among all individual violators on the list. He was fined 24.97 million yuan ($3.62 million), the heaviest penalty for individual violators.

A millionaire in Chongqing City who transferred 13.84 million yuan ($2 million) in 16 batches through an underground bank was fined 968,500 yuan ($140,236).  A millionaire in Hubei Province who transferred 8.99 million yuan ($1.30 million) in 34 batches through an underground bank was fined 719,500 yuan ($104,182).

Among the six corporate violation cases, five corporations transferred funds overseas under the guise of fake trade transactions, while a sixth corporation violated a regulation that guarantors for offshore loans must be registered within mainland China.

For instance, Guangzhou Yangfan Trading Co. presented a fake invoice to a Chinese bank, claiming to have made a purchase when it was actually a way to transfer $92.86 million offshore. The company was fined 37.34 million yuan ($5.41 million), the biggest fine on the list.

Capital Outflow

Shadow banking is a major problem for China as it seeks to curb capital outflow. Most of these underground banks operate by matching people who wish to bring money into China with those who want to get it out. In each transfer, the two clients who have been identified as a match would deposit money into each other’s accounts—one inside China, the other in Hong Kong. The underground bank, acting as a middleman, makes a profit by charging a high service fee for enabling the transaction.

Although funds don’t actually cross the border, the two clients essentially moved money from one jurisdiction to the other, while evading the $50,000 limit. This method of fund transfer is very difficult for regulators to track.

Despite the Chinese authorities’ strict measures, Chinese citizens have come up with many “creative” ways to transfer money offshore—especially as currency devaluation and the looming economic crisis in China threaten their assets. Many have purchased real estate overseas as a safe haven to “park” their money.

According to data from the U.S. National Realtors Association, Chinese nationals have been the top foreign buyers of residential housing in the country for six consecutive years from 2013 to 2018.