Worried About Capital Flight, Chinese Regime Is Cracking Down on ‘Underground Money Shops’

August 26, 2015 Updated: December 7, 2015

Chinese authorities have launched a campaign to crack down on illicit money outflows as billions of dollars in capital flight threatens China’s foreign currency reserves. According to the state-run Beijing News, the action, called Operation Silver Eagle II, targets so-called underground money shops, as the laundering operations are known.

Meng Qingfeng, deputy head of China’s Public Security Bureau, said at an Aug. 24 teleconference that the money shops had become an important channel of illicit money outflow for various economic crimes.

Though individual transactions may be minor, the cash traded by illicit banks adds up. As of Aug. 26, 66 rings have been caught by the authorities, the Beijing Times reported. They were found to have been responsible for over $67 billion that left the country. The time period for this flight was not specified.

That figure itself, however, is just a fraction of the over $1 trillion that Global Financial Integrity, an American think tank, estimates was illegally carted out of China between 2003 and 2012.

Early this month, Operation Silver Eagle II targeted over 30 illicit banks in Beijing, Shanghai, Liaoning Province, and along the affluent southern Chinese coast, according to the Beijing Times. Police indicated that many of the cases involved money transfers by corrupt ex-officials living in overseas exile.

Many of the illicit transfers and conversions were committed by teams of individuals, often street vendors in southern China and Hong Kong, taking advantage of lax banking and stock trading regulations, the Beijing Times reported. According to the International Consortium of Investigative Journalists, 22,000 individuals from mainland China and Hong Kong were listed as having offshore accounts that could be used to disguise or transfer illicit wealth.

According to Chinese officials, one man alone was discovered to have transported $5 million out of the country last year.

Damage Control

The crackdown seems to be an attempt to help stabilize the Chinese economy as the stock market has been nosediving and the yuan depreciated. In the last two weeks, Chinese banks have poured $100 billion from foreign cash reserves into propping up the domestic currency, according to Reuters.

Yet, as the Beijing Times report notes, just cracking down on the small, individual-run underground money shops may be a non-solution. The problem begins higher up on the institutional food chain, as Meng Qingfeng indicated when he called for the “ferreting out of upstream crimes” committed in China’s massive state-run banks, which, despite regulations, encourage cash trading and outflow.

The banks have been criticized. As part of his ongoing anti-corruption campaign, Communist Party leader Xi Jinping has demanded “internal discipline” from the state enterprises, including the financial sector.

China Central Television ran a program accusing the People’s Bank of China of covertly preparing large sums of cash for those preparing to emigrate abroad; a list of high-profile individuals with offshore accounts was also featured in the exposé.

For state regulators, these shady deals are indistinguishable from legitimate trade, which helped fuel China’s explosive economic development in the last two decades. In this, China finds itself in something of a bind: on the one hand, unchecked capital flight is depleting the country’s foreign reserves; at the same time, overly drastic measures taken against the banks would mean stifling China’s international trade.

Jenny Li contributed to this report.