Chinese authorities have recently enacted harsher punishments for those caught exchanging foreign currency outside official channels, in an effort to crack down on underground banking and to stymie capital outflow.
China only allows citizens to exchange the equivalent of $50,000 within one year—and only at banks. Anyone who needs more than the equivalent of $50,000 in foreign currency must apply for a permit from China’s State Administration of Foreign Exchange (SAFE).
Underground banks—which often charge a service fee lower than banks and don’t have an amount limitation—have proliferated as a result. To skirt the limitation, many citizens also ask relatives and friends for help to exchange money, if they need more than $50,000 in a year. But for now, this channel is illegal.
A Feb. 14 report by the state-run Beijing News explained the interpretation of new guidelines issued by China’s supreme court and highest prosecutor body, which went into effect Feb. 1. The guidelines stipulate that people won’t be allowed to exchange currency in banks for their friends or relatives.
Anyone found exchanging more than 5 million yuan ($738,000) through illegal channels is considered a “serious case,” punishable by up to five years in prison, according to a report by state-run media Xinhua, that cited a financial lawyer at the Guangqiang Law Office located in the city of Guangzhou. Illegal channels include underground banks, casinos, or friends and relatives.
Anyone found exchanging up to 25 million yuan ($3.69 million) would be sentenced to five to 15 years in prison and fined 0.1 percent of the exchanged amount.
The guidelines also note that anyone whose accumulated exchanges reaches the two designated limits will automatically be charged with the crime of assisting terrorist activities or money laundering.
Underground banks have long supplied exchange services for clients locally and internationally, sometimes for illegal money-laundering activities, other times for Chinese citizens who make large transactions.
The SAFE published a notice of 20 cases on Oct. 22, 2018. In one, a businessman surnamed Chen from Hong Kong wanted to transfer his money out of mainland China. From January to August of 2015, Chen transferred 17 million yuan ($2.5 million) to an underground bank, which was then exchanged into a foreign currency into Chen’s overseas bank accounts. Chen was fined 1.53 million yuan ($230,000) in 2018.
Beijing News analyzed on Feb. 14 that if that had happened under the new guidelines, Chen would have faced a jail sentence.
Since Jan. 1, 2018, the Chinese regime has tightened capital outflow by limiting citizens’ bank accounts: they can only withdraw up to 100,000 yuan ($14,800) out of China each year.
And since Jan. 1 of this year, the regime has asked all banks and online financial services—such as e-retailer websites—to report large transactions to the People’s Bank of China, the central bank.
For an individual, the total transactions in one day can’t exceed 200,000 yuan ($29,530), total domestic daily spending can’t be more than 50,000 yuan ($7,380), or total payments to parties outside China can’t exceed the value of $10,000.
In the past decade, Chinese buyers have become more and more active in the real estate markets of the United States, Canada, Australia, and other developed countries. With authorities tightening currency exchange transactions, these Western real estate markets could be affected.
According to the U.S. National Association of Realtors, from April 2017 to March 2018, foreign buyers purchased 266,800 residential properties, valued at roughly $121 billion. Fifteen percent of the buyers were Chinese citizens.
Foreign investors bought 13,198 residential real estate in Australia, worth AU$25.2 billion ($18.1 billion) in 2016-2017, according to the Australian Foreign Investment Review Board. Forty percent of the investors were from China.
Most buyers need to transfer the money overseas from China to make payments.