China's "Secret Money Laundering" Story Goes Mainstream; Is Promptly Censored

Tyler Durden's picture

Last week, Zero Hedge first reported on this side of the Pacific, some very troubling news: the biggest offshore buyer of luxury US real estate, that would be Chinese money laundering oligarchs and other member of the upper class, may be locked out of any future US housing purchases for a long, long time. The reason: an unexpected revelation by the power state CCTV channel revealed that contrary to popular disinformation, some of the largest Chinese banks - the PBOC included - were not only permitting but actively encouraging Chinese "money laundering" far above the $50,000/year statutory limit, the immediate result of which was soaring prices of the luxury segment of the US housing market.

We summarized the next steps last Thursday:

"So what happens next? Assuming there is the anticipated resulting backlash and crackdown on Chinese banks, which will finally enforce the $50K/year outflow limitation, this could well be the worst possible news not only for Chinese inflation, which suddenly - no longer having a convenient outlet for the unprecedented liquidity formed in the country every month - is set to soar, but also for the ultra-luxury housing in the US.


Because without the Chinese bid in a market in which the Chinese are the biggest marginal buyer scooping up real estate across the land, sight unseen, and paid for in laundered cash (which the NAR blissfully does not need to know about due to its AML exemptions), watch as suddenly the 4th dead cat bounce in US housing since the Lehman failure rediscovers just how painful gravity really is."

We forgot to mention one other thing that would promptly happen: the rest of the US mainstream media would quickly catch to this critical story which is still woefully unreported.

First, the WSJ, from earlier today, which basically provides a recap of what we wrote before:

China's major banks have halted an experimental program, sanctioned by the country's central bank, that helped citizens transfer large sums overseas despite government capital controls, according to people with knowledge of the matter.

The halt, which the people said was likely to be temporary, comes after the program was criticized by China's powerful state television broadcaster, underscoring the political sensitivity of the issue of wealthy Chinese moving money abroad. Experts said the criticism could set back China's efforts to ease its grip on the country's financial system.


* * *


The controversy comes at a politically sensitive time. China's top leadership is deepening a nationwide effort to fight corruption, with a focus on officials suspected of trying to move abroad assets they might have gotten through bribes or other illegal means. Earlier this month, Liu Yunshan —a member of the Communist Party's top decision-making body who is in charge of the country's propaganda apparatus—called on the government to address the problem of what are known in the country as naked officials, or those whose families have moved overseas.


Analysts and economists have widely acknowledged that China's closed capital-account system has become more porous and that the rules are routinely circumvented. A 2008 report by the PBOC said that up to 18,000 corrupt officials and employees of state-owned enterprises had fled abroad or gone into hiding since the mid-1990s, and that they were suspected of having taken $123 billion with them. A favored method, according to the PBOC report, involved squirreling cash away with the help of loved ones emigrating abroad.


The CCTV report brought to light a trial program the PBOC launched about two years ago that allowed a few approved banks, including Bank of China, ICBC and China Citic, to start offering cross-border yuan remittance services for Chinese individuals through their branches in the southern province of Guangdong. The PBOC never publicly announced the program because it intended to carry out the trial quietly, the people familiar with the matter said.


"The program itself is neither illegal nor improper as it's been approved by the central bank, but the question is if any particular bank has gone too far by offering clients services they are not supposed to," said a senior executive at a big state-owned bank in Beijing. "We all had to put a brake on it before the central bank draws a conclusion from its investigation."

Of course the program was legal and proper: it served a key purpose - to keep Chinese hot money inflation under control, by which we mean, exporting it to the US housing market. This is what we said last week:

Why would the PBOC agree to quietly bless this activity which it has, at least openly, blasted vocally in the past?


Simple - to keep inflation in check.


Recall that China is a country which creates nearly $4 trillion in bank deposits every year. Also recall that back in 2011 China nearly chocked when inflation briefly soared out of control, leading to sporadic "Arab Spring" type riots in various cities. And since China simply can not reduce the pace of its loan creation at the macro level without crushing the economy, what it needs is to find outlets - legal or otherwise - that permit the outflow of funds.


Which is why it is not at all surprising that as SCMP reports, the scheme was launched in 2011, just as China's scary encounter with soaring inflation was unfolding and Beijing needed a fast way to solve the overabundance of domestic liquidity. Basically at that point the central bank agreed to keep its eyes shut as wealthy oligarchs transferred funds to developed world nations, something the US government and NAR were delighted by as it kept real estate prices (if only at the very top) soaring, dragging the entire housing market higher with them. Furthermore recall: the one thing the Fed has wanted more than anything for the past several years is inflation. And since the US economy is nowhere near strong enough to create the kind of inflation needed, with the bulk of the Fed's reserves ending up in the capital markets and the latest and greatest credit bubble, the Fed would be more than happy to import some of China's inflation from it, even if that means a housing market which at the upper end is no longer accessible to anyone but the 0.0001%.

This explains the following qualifier from the WSJ:

Officials close to the PBOC said on Monday that it isn't likely that the central bank will withdraw the trial program altogether, as it is in keeping with Beijing's broader effort to make it easier for funds to move in and out of the mainland and to promote the yuan's use overseas. In its latest announcements aimed at gradually freeing up the flow of money, China's foreign-exchange regulator on Monday issued revised rules that would make it easier for Chinese companies to keep overseas profits and dividends earned in other countries.


Some analysts say the halting of the business amounts to a setback to the government's reform efforts, at least for now. "This action highlights the tension between the benefits of easing restrictions on capital flows and the risks of allowing freer movement of capital in the absence of effective regulation of financial institutions," said Eswar Prasad, a China scholar at Cornell University.

Worse, should the hot money flow into ultra luxury US real estate stop, watch as New York City double (and triple) digit million duplex and triplex condo plummet in value as the dumb, marginal money is locked out for good.

Which brings us to the next account of the same story: that of Bloomberg, and its specifics of just how it took place. According to Bloomberg the endorsed money laundering program was introduced in 2011 for overseas property purchases and emigration and, drumroll, doesn’t constitute money laundering, Bank of China said in a July 9 statement. The transfers were allowed by regulators and reported to them, the bank said.

“What it shows is the government has been trying to internationalize the renminbi for a lot longer than we thought,” Jim Antos, a Hong Kong-based analyst at Mizuho Securities Ltd., said by phone, using the official name for China’s currency and referring to policy makers’ long-stated goal of allowing the yuan to become freely convertible with other currencies. “I’m rather encouraged by this news because this is the way they need to go.”


China’s foreign-exchange rules cap the maximum amount of yuan that individuals are allowed to convert at $50,000 each year and ban them from transferring the currency abroad directly. Policy makers have taken steps in recent years, including allowing freer movements of capital in and out of China, as they seek to boost the global stature of the not-yet-fully convertible yuan.


There’s a silver lining in this incident as it may force the regulators to address the issue in a more open and transparent way,” Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group Ltd., said by phone. “This is an irreversible trend.”


The issue came to light after CCTV said Bank of China helped customers transfer unlimited amounts of yuan abroad through a product called Youhuitong, which means “superior foreign-exchange channel.”

Of course, this being China, it is far more likely that the "incident" will force the regulators to step aside and keep this all too critical overflow valve of China's epic hot money, amounting to over nearly $4 trillion in credit money created out of thin air every year, perfectly function for future needs. Especially considering the original report has now been permanently "suicided." That's right: any reference to this story in China no longer exists!

The Guangdong branch of China’s currency regulator, the State Administration of Foreign Exchange, picked Bank of China, China Citic Bank Corp. (998) and a foreign lender to let individuals transfer yuan abroad in a trial the banks were told not to promote, Time Weekly reported in April 2013. A Beijing-based Citic Bank press officer declined to comment on the program.


While Bank of China didn’t provide figures, the 21st Century Business Herald estimated the lender has moved about 20 billion yuan ($3.2 billion) abroad through Youhuitong, citing people with knowledge of the trial program. “Many commercial banks” in Guangdong offer a similar service, Bank of China said in its statement, without naming them.


On CCTV’s website, the report on Bank of China hasn’t been viewable since at least July 12. Today, the story link led only to a series of advertisements. A spokeswoman for CCTV’s international relations department, which handles foreign media inquiries, didn’t immediately respond to an e-mailed request for comment on why the story wasn’t available.

And the details:

Youhuitong customers would typically deposit yuan with Bank of China at least two weeks before the transfer, the person said. Once approved, the customer and the bank agree on an exchange rate before the funds are moved to an overseas account designated by the customer, he said. Money destined for real estate would go directly to the property seller’s account to ensure the cash won’t be misused, he said.

Remember: the program is endorsed not only by the PBOC but certainly by the Fed which is delighted in importing tens of billions in offshore money spurring inflation in the US, even if it is very localized, asset-price inflation:

A Beijing-based press officer for Bank of China declined to comment. Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. (939), the nation’s two largest banks, declined to comment on whether they offer similar products.


HSBC Holdings Plc (5), which runs the largest branch network among foreign banks in China, offers its Chinese clients another way to access offshore mortgages while avoiding the cap on foreign-exchange conversion, according to a person familiar with the mechanism, who asked not to be identified without having authorization to speak publicly.


Customers deposit yuan with HSBC’s mainland unit or purchase its wealth-management products, and the bank’s overseas branch then issues a foreign-currency denominated mortgage using the China deposits as collateral, the person said.


“We seek to abide by the rules and laws of the jurisdictions and geographies in which we operate,” said Gareth Hewett, a Hong Kong-based HSBC spokesman.

Translation: unlike money laundering originating at BNP or elsewhere in continental Europe, this particular instance of offshore funds parking in US real estate has been blessed by Janet Yellen. Why? "Clearly the property market wouldn’t nearly be so robust as it is today without mainland money,” Mizuho’s Antos said. “How did they do it? With Bank of China’s help. There has been a tremendous amount of mainland money flowing offshore and it couldn’t have happened without” official approval."

And it's not just the US:

Chinese have become the biggest investors in Australia’s commercial and residential property, with purchases surging 42 percent to A$5.9 billion ($5.6 billion) in the year to June 2013, according to the country’s Foreign Investment Review Board.

Vancouver’s real estate market has also seen the impact, having been “fueled tremendously in the last couple of years by high-end wealthy Chinese and Hong Kong buyers,” according to real estate agent Malcolm Hasman.

But it's the US that would be crushed should Chinese money laundering into ultra luxury real estate - something we said is happening in 2012 - cease. From Bloomberg:

While Chinese buyers’ $22b in spending on U.S. homes in yr through March is “small fraction” of total existing-home sales, a halt in spending would “make a big impact” in cities with the most Chinese buyers, including Los Angeles, Las Vegas, NYC, San Francisco, Nela Richardson, Redfin chief economist, says in note to Bloomberg First Word. She notes Redfin agents have told her Chinese buyers will sometimes have several family, friends transfer $50k at closing, in keeping with yuan cap

Chinese parents also buy high-end properties where kids are going to college, use them as vacation homes or rentals after graduation

Raymond James also piggybacked on our conclusion adding that on the West Coast, Chinese, Taiwanese, Filipino buyers have been scouring parts of Orange County, and Las Vegas; and clearly it may hurt Lennar, SPF if travel/capital flows are suddenly restricted.

Because remember: there is good illegal money laundering, such as this one, and then there is bad illegal laundering, that which does not end up being invested in the massively overvalued luxury segment of the US housing market.

And that is all you need to know on a topic which will hardly receive much more coverage in any media outlets in the US, and certainly not China.

* * *

There is much more on this fascinating topic: those eager for a glimpse of the next steps are urged to read: "Bank of China-CCTV drama may reveal power struggle in Beijing - Money laundering accusation may be sign of a power struggle within mainland banking system." Because when the laundering of trillions of dollars is at stake, a power struggle is certainly assured.

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TheFourthStooge-ing's picture

Blobbing up of corruption, bad debt is continuing, when the panic crash, who also can not predict. Censor bad news attempt to delay the inevitable results of it perish fate.

Madness out the transfer of assets in addition to the corrupt officials, in recent years made their fortunes in the size of the rich and a large part of the property firmly Dangdang arrived to a foreign land.

Of course, the Chinese Communist upper struggle for power will be in this last scene was very impressive and ugly bestiality on its head.

zorba THE GREEK's picture

The U.S. should try the same technique to get its GDP up.

DoChenRollingBearing's picture

Seriously rich Chinese are invited to bid at least $1.5 million more than our condo is worth.  But, we may raise that to $2 million over its value.

But, that's OK.  The higher the price, the more Chinese money gets laundered.  Everyone's a winner, especially the Bearing family!

DeadFred's picture

Bay Area real estate is starting to cool down, finally. Even the agents are starting to admit it. Still when they say $123 billion has been squirreled away with the help of overseas family members I envision some really big-assed squirrels.

Trevor Philips CEO of Trevor Philips Industries's picture

Vancouver is up again in June.

I found this line from the blog funny:

"The reason: an unexpected revelation by the power state CCTV channel revealed that contrary to popular disinformation, some of the largest Chinese banks - the PBOC included - were not only permitting but actively encouraging Chinese "money laundering" far above the $50,000/year statutory limit, the immediate result of which was soaring prices of the luxury segment of the US housing market."

Not only does everyone know it is easy to get around the 50K limit, there's really not much disinformation attempt to say otherwise. It's a pretty common practice. 10,000s of student familes probably do it every month to make sure the kids get +100K a year for university and living.

Most hardly have to use any bank functionality; you just use other family members or friends. I saw this first-hand dozens of times in university when I was yet dating my wife; saw numerous students with 100,000K for daily living in RBC or TD chequing acounts, lots of 'average' Chinese students put 40-50% down on Vancouver housing (to this day).

The Politburo response is mostly about the really rich getting billions out of the country; not just the regular industrial class taking out millions just to put Audis and average Vancouver homes. That's far too common for anyone to care.

Vampyroteuthis infernalis's picture

Tyler, great reporting on the laundering scheme from China. The trouble I have is with WHY this mad real estate buying is occurring. It has little to do with inflation. It has everything to do with rewarding cronies through laundering their money out of the China before it economically implodes.

SubjectivObject's picture

The Eagle [China] never lost so much time as when he listened to the Crow [US].

Attack China!  Send 'em the Fed!

Cognitive Dissonance's picture

Now you see it , now you don't.

(The story, not the cash. Still moving the cash offshore any way they can. Got to keep the local Chinese inflation under 'control' or the natives get restless.)

Oldwood's picture

OK, so explain it to me. How do they print trillions without massive devaluation? I know they have their currency pegged to the dollar but how? Is it simply because the US is printing like mad as well? I don't get it.

Taku's picture

It's actually brilliant. US Fed prints. Top 1% gets happy. Invests where? Hot FDI to China. 1% there get happy, rinse repeat etc etc

But who knows

disabledvet's picture

Bitcoin. That's how this game gets played.

Take a look at the value. "Tells you everything you need to know."

Bioscale's picture

Looking at the bitcoin valuation in $ tells you just nothing.

Professorlocknload's picture

" Is it simply because the US is printing like mad as well?"

Yup. China is exporting it's surplus currency. (Inflation)

7.62x54r's picture

It's an old trick. Use inflated currency to buy assets abroad to avoid inflation at home.

Doesn't work as well these days, though. And yes, the value of the currency dumps as the price of real estate rises. Spend your fiat while you can.

Offthebeach's picture

Instead. Of having 300+ million American sheeple, you have a billion + Chinese sheeple. Plus the we-take-your-illegal second child-to-Foxcom Apple plantation. Or a bullet.

So, Homeland Sheeple Control and local populace dog killing internal security forces come up to Chinese Central Gangster agility, or elites will have to make do.

Antifaschistische's picture

sounds like a win win win situation for everyone.  Everyone wins.  The Chinese people win through delayed inflation, the money launderers win, the inferior melanin inhabitants (fair skinned anglos) of San Marino win by selling their homes at hyper inflated prices, the California property tax collectors win....everyone wins.


...perhaps until the Chinese attempt to repartiate some cash and their US Dollar holding convert to about a 1/3rd of what they originated at in RMB.

Harbanger's picture

Are we arguing for better capital controls? and what makes it laundering? did they not pay tax in china? China has capital controls that limit transfers out of the country to $50,000/year.  Let say you sold your house for $500,000 and wanted to relocate to another country, It would take you ten years to transfer the money to buy another house.

CCanuck's picture

Capital Controls are for the should know that Harb.

disabledvet's picture

As long as my five dollar coffee and bagel still cost me five bucks from the time I go to the ATM and convert to btc then "reconvert" to coffee and a bagel...why the phuck would I care?

"Just need an ATM with no NSA allowed."

7.62x54r's picture

How did you get the bitcoin in the first place?

If you are living off of BTC denominated savings, you are OK. If you have an income in fiat, you are still screwed.

shouldvekilledthem's picture

I recommend mycelium trader and localbitcoins if you want to keep your anonimity.

Harbanger's picture

Capital controls shouldn't exist at all, it's a sign of desperation on the part of governments.  Why should any gov tell you what you can do with your money after they taxed you?  Ironically people in the west are trying to get their own money out of the system and even out of their country for fear of coming capital controls.

Peak Finance's picture

It's illegality is implied.

I mean, honestly, how do so many low-level Chinese Buerocrats get an extra 500k, in CASH, to blow on American Real Estate? 


7.62x54r's picture

The ones in the party. Rank hath its privleges. Corruption by party members is ok, provided it doesn't become newsworthy.

Antifaschistische's picture

No sir...not arguing for any control at all.   I'd actually like to buy an apartment in China...but there's rules there too.   I'd really like to buy a home in San Marino but now I fold...priced out indefinitely.   Taxes are just control mechanisms and I can't avoid those either.   It's a mad world.

813kml's picture

How do you get cash so clean Mr. Lee?  Ancient Chinese secret!

/long Calgon

AccreditedEYE's picture

Ahhh! Now I see where Blackstone and the institutional money will be looking to off-load properties. Now wonder these fellas are the sharpest minds in the room. While building a new and unique asset class they simultaneously help get their seller lined up + build the demand. China indeed Schwarzman!

Yen Cross's picture

    So the shitshack inflated ghost cities are left for the serfs and stupid BTFATH foreign investors.

DoChenRollingBearing's picture

Brazil is down for the count. Now it looks like China is in deep as well. We already know India will not be any kind of serious competitor to the USA.

For the BRICs that leaves Russia...

Russia anyone? Anyone with solid ties to Russia's economy or financial system is invited to send me your comments, here or by gmail (@ my ZH name).

7.62x54r's picture

China has gold.

They will keep printing fiat and exporting the inflation until the west collapses. Then they will introduce a hard renmimbi, only purchasable with metal or energy products.

Introducing a hard currency while the rest of the world is using fiat will result in local deflation and bank collapses, as well as currency flight as foriegners buy it up with fiat. They need to wait until no one wants the foriegn fiat.

Eahudimac's picture

Exactly.Why should they stop? They are playing the western bankers game and winning. What is all goes down, China will be holding all the gold. Americans will be scrambling to swap their worthless dollars for renmimbi.

Seasmoke's picture

Now the Chinese should start buying up all the US mom and pop businesses.

Peak Finance's picture

LOLZ both of them?

Mom and Pop shops are gone gone gone

DirkDiggler11's picture

How about we "encourage" the Chineese to take over Wal-Mart instead? WM is already just a showcase for everything made in China, we may as well get them to take the reigns of the Big Blue Shit Shack as well.

Leave the Few remaining Mom and Pop outlets alone.

Skateboarder's picture

"The program itself is neither illegal nor improper as it's been approved by the central bank..."

What a wonderful statement this is.

Professorlocknload's picture

I caught that too. Now we know the pecking order. Banks trump Courts and Rules of Law.

Pretty much seals it.

besnook's picture

so that's the bid under the market. if they are buying real estate and companies then they are buying the market which explains the disconnect. it is like during the hay day of the 401k deposits when there was so much money chasing the same investments during the internet bubble the market bubbled then popped. the difference this time is the flow may last for awhile. this isn't japan in the 80s. this is fn china, all 1.3 billion of them.they are colonizing the world with the chinese model. buy everything with all the money made trading then ship as many chinese as possible to the country to set up shop permanently tying the country to china with people relationships without taking out the .gov. ask the vietnamese how much they like their chinese restaurants.


Clowns on Acid's picture

All that matters is that Benanke and Yellen ae happy, and that bthe bS&P is at record highs... stop complaining.

q99x2's picture

I want a printing press damn it.

RabbitChow's picture

dont need a printing press. since its all fiat, just sell some paper or empty promises. everyone else does it. why counterfeit when you can sell something for nothing.

omniversling's picture

or sell nothing for something..

eg: create credit/debt from the stroke of a keyboard, or sell a paper dollar that costs $0.0000001 to produce for $1..

hedgiex's picture

The economy is more open than many think. PBOC (Central Bank) is the brains in the fincancial economy. They see the flood of liquidity and reversing the flow so they keep one eye closed to the valve. The 4 to 5 major banks are credit allocators to sectors in a still planned economy. No way that these State Controlled Banks dare to defy PBOC if PBOC frowns upon the valve.

Their preferred method to reverse the flow is to channel it through their state owned enterprises for investment into global resources. Not easy for them to implement with their outdated structures and when the private sector has grown more significantly than their SOEs.

PBOC cannot bless this valve for in doing so, it may spark fear of capital flight that undermine their currency that they are promoting internationally.

No conspiracy theory in this article and the test lies in uncoordinated muffling of the media (same expected unsophisticated method used by bureaucrats outside PBOC not educated with global markets operations). Some traders have seen the valve. The valve now closing because of the exposure shall bring to the fore of the challenge of product price inflation and that's where the trading actions lie.

ObamaDepression's picture

Great investigative reporting ZH!

pachanguero's picture

In Thailand where I live the Russians and the Chi-coms  are doing the same thing.  But the bubble here is so big it makes little deference. 

Magooo's picture

When does ZH get its first pulitzer?

Joenobody12's picture

More recent developement. Several people including news anchors at CCTV have been arrested. 

The hot money will continue to flow. 

According to several sources , much more than $4 trillion USD have left China. What is left in China are the contaminated land, rivers and air. 

Fuku Ben's picture

Giving cash to the homeless and then force them to give it back to you. Is this some new type of money laundering I haven't heard about?

doctor10's picture

It all lasts as long as yuan remains pegged to USD.

Ban KKiller's picture

HSBC bank, your "go to" criminal partner for money laundering. Everyone knows that!