Presenting 5+1 Ways To Smuggle Billions Out Of China

Last week, we brought you the story of “Mr. Chen” and his “yellow loafers,” tea, and Snickers bars. 

Chen is apparently a kind of catch-all for China’s network of underground bank frontmen operating out of kiosks selling candy bars and “fizzy drinks” (to quote WSJ). As long as you know the right shady go-between, you can work with Chen to move money out of the country in violation of the official $50,000/year limit. 

The method of choice for these “banks” is apparently "matchmaking", whereby you simply give Chen some money and the funds show up a few hours later in Hong Kong. 

Of course this is an underground business and so things don’t always go as planned, something a “Mr. Chan” (with an "a") discovered when he attempted to move CNY63 million out of the country via “Mr. Chen” (with an "e") only to find that once the transaction was complete, he only had CNY8 million left. That’s a pretty hefty fee even in the world of money laundering and so, Chan reported “Chen” to the authorities. The subsequent investigation led to the arrest of some 31 people and netted 1,087 accounts holding some CNY12 billion. 

None of the accused were ever heard from again.

Well, now that the market is convinced that Beijing is targeting a yuan deval that’s orders of magnitude larger than what we’ve seen so far, capital continues to flow out of the country and underground banks aren’t the only conduit. There’s the infamous UnionPay end-around for instance as well as good old fashioned cash in a briefcase. Or cash on your legs:

On Tuesday, Bloomberg is out with a visual summary of several ways you can get your cash out of China. Below, find the rundown along with some color.

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Read the full Bloomberg piece here


Daniel Zhang, 34, is a self-made millionaire who lives in China’s southern city of Shenzhen. Earlier this year he gave the equivalent of $77,000 to a local money-changing shop and saw it appear less than an hour later in a bank account he had previously opened across the border in Hong Kong.

“It was easier than I expected and cost little,” says Zhang, who bought Hong Kong stocks with the money. “I don’t know whether this is legal, and I don’t care that much.”

In Hong Kong, more than 1,200 currency-exchange shops have seemingly little daily activity. These brightly lit storefronts specialize in helping wealthy Chinese transfer their money overseas. The premium isn’t high — only about 1,000 yuan ($160) per HK$1 million ($130,000) more than bank exchange rates would be if they could do the transaction.

It works like this: Chinese come to Hong Kong and open a bank account. Then they go to a money-change shop, which provides a mainland bank account number for the customer to make a domestic transfer from his or her account inside China. As soon as that transaction is confirmed, typically in just two hours, the Hong Kong money changer then transfers the equivalent in Hong Kong or U.S. dollars or any other foreign currency into the client’s Hong Kong account. Technically, no money crosses the border -- both transactions are completed by domestic transfers.

Even with a $500,000 U.S. dollar check in his pocket, 10 times the amount allowed by law, factory owner Frank Deng felt at ease as he passed though Chinese customs from Shenzhen to Hong Kong earlier this year.

He got the check from a so-called underground bank in southern China’s Guangdong province, drawn from a Hong Kong bank account and denominated in U.S. dollars so that it could be cashed upon crossing the border. Deng had given the “bank,” which operates as part of China’s shadow-banking system, the equivalent in yuan from his account in China in order to receive the check. Using that money, plus other deposits on other trips, Deng planned to make a 50 percent down payment on a HK$10 million apartment.

Jenny Cai, a Shanghai resident, bought a A$1.2 million ($867,000) apartment in downtown Sydney after seeing pictures at a marketing event in Shanghai. To do it, she asked her husband and daughter to combine their $50,000 annual quotas with hers to come up with the down payment.

The practice is called “smurfing” - named after the little blue cartoon characters who collectively make up the whole. Also known in Chinese as “ants moving their house,” for small grains of dirt being moved individually, the government has started restricting the amounts of cash that can be moved in this way, as well as how often banks can send money to a single account abroad from multiple sources.

Mainland Chinese make news by being caught with cash in their luggage or strapped to their bodies: Shenzhen customs stopped 80 people trying to smuggle a total of 30 million yuan into Hong Kong in the first three months of this year, Ming Pao newspaper reported.

For the most affluent people, Chinese banks offer a legitimate channel to get money for home purchases overseas. China Construction Bank Corp., the nation’s second-largest lender, last year started a product that enables its private banking clients to borrow up to HK$20 million in Hong Kong by using yuan-denominated deposits and other assets on the mainland as collateral. 

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As we've documented extensively, one shouldn't expect this to abate anytime soon. Here's the situation as we described it previously: 

The problem for China is that there are quite a few reasons to believe that the PBoC is targeting a much larger devaluation before it's all said and done. This keeps the pressure on as the local population, worried about losing purchasing power in the coming months and years, continues to move money out of the country. As the capital flight accelerates, the PBoC is forced into still more FX interventions to prop up the yuan and that means more FX reserve liquidation. Of course those interventions must be offset with RRR cuts in order to preserve liquidity. But the market interprets rate cuts as more easing (even if, when considered with hundreds of billions in FX reserve drawdowns, the net effect doesn't amount to much) which only serves to put still more pressure on the yuan, prompting the entire cycle to repeat itself. Throw in a crashing stock market and it's pretty clear that the outflows aren't set to abate, or, as we put it previously, "it's all about expectations and since China needs to boost exports and stimulate its economy - which is the fundamental reason why it proceeded with devaluation in the first place - any stop gap measures to halt the devaluation are doomed to fail." 

And while Bloomberg does an admirable job of mapping out the various ways Chinese citizens can break the law on the way to explaining what we've been harping on for years (namely that affluent Chinese are behind soaring real estate prices the world over) they failed to document the cheap, risk-free way to get money out of the country. On that note, we close with excerpts from "The Reason For Bitcoin's Recent 60% Surge Revealed":

It was precisely two months ago, on September 2nd, when we explained that as a result of China's recent currency devaluation, in order to mitigate the inevitable capital outflows that such an FX move would unleash, China was "scrambling to enforce capital controls" in order to prevent the exit of hot (and not so hot) money from China's economy.

We then ventured to say that "this is great news for bitcoin":

At the time of that forecast, the price of bitcoin was highlighted with the red arrow.


And while we were confident it was indeed Chinese capital "mobility" using the bitcoin channel that was the impetus behind the nearly 60% surge in the price of the digital currency in past two months to fresh 2015 highs, moments ago we got the closest thing to a confirmation when Bitcoin Magazine reported that "China is leading the charge, with the price trading anywhere from $10-$15 above the rates on U.S. and European exchanges."

Bitcoin Magazine further adds that "China is experiencing unprecedented amounts of growth. On October 30th, Jack C. Liu, the Head of International at OKCoin, said, in a tweet, that it had been the “busiest day of the year @OKCoinBTC as #Bitcoin trades to 2015 high of $344. No clawbacks on futures, no downtime. Great day for us & industry.”"

Two days later, he went on to reveal that OkCoin had seen incredible demand for accounts on the exchange.

And here is the validation that, just as predicted here two months ago, bitcoin has become the go-to asset class for millions of Chinese savers seeking to quietly and under the radar transfer funds from point A to point B, whatever that may be, in the process circumventing the recently expanded governmental capital controls:

While he didn’t provide any concrete numbers, he did comment last week on what was driving the adoption. “Some Chinese traders are expressing a view on the CNY exchange rate after the last devaluation and you have interest by mainland speculators to move to other assets after the stock market fallout,” he explained in an interview with Bitcoin Magazine.