In China, companies, banks, and individuals cannot freely move money into or out of the country unless they comply with strict foreign exchange (forex) rules.
The Chinese communist party (CCP) has been imposing “zero tolerance” controls to limit foreign exchange trading done in a private or surreptitious manner. But despite the CCP’s best efforts, the massive outflow of Chinese capital to other countries is continuing and the speed has recently accelerated.
One example of the CCP’s crackdown efforts involves the Tianjin-based
Quanjian Group. Quanjian was fined $14.6 million for its foreign trading by the Anhui Branch of China’s State Administration of Foreign Exchange (SAFE).
The charges against Quanjian were based on
Article 45 of Regulations of the People’s Republic of China on Foreign Exchange Administration (Decree #532).
Article 45 states that if a person trades foreign currency privately, or in a disguised manner, or as a trade middleman, the foreign exchange authority shall give a warning, confiscate the illegal proceeds, and impose a fine of not more than 30 percent of the illegal amount; in serious cases, a fine of more than 30 percernt of the illegal amount or the equivalent value shall be imposed.
Caixin, the official Chinese media, reported that although Quanjian’s “illegal proceeds” had not been confiscated, such a large fine was rare. However, Caixin’s readers were unable to assess whether the fine was justified since SAFE had not publicized the proceeds of Quanjian’s trading.
Since 2021, only two of SAFE’s administrative fines have exceeded $1.6 million. The first occurred in July 2021 when Poly Culture Group Corp. Ltd. was fined $3.8 million for “transferring foreign exchange to overseas.” The second occurred just a few months later in December when the Meifu Jiaye (Xiamen) Automobile Service Co., Ltd. was fined $4.5 million for “illegal settlement of foreign exchange.”
CCP Tightens Policies on Private Forex Trading
During an interview with The Epoch Times, Yeliang Xia, a former associate professor of economics at Peking University and a visiting researcher at the Cato Institute, a U.S. think tank, spoke about the CCP’s evolving actions to reform China’s foreign exchange system.Starting in the early 1990s, said Xia, the CCP’s initial plan was to gradually loosen foreign exchange controls so the RMB could be used to facilitate international payments and storage. But when the outflow of capital greatly exceeded expectations, the CCP reversed course and began tightening its policies.
An article, published
in 2006 by the Chinese Academy of Sciences, said the scale of capital fleeing China has been rising since the 1990s, with China’s loss of capital reaching $87 billion in 1998. And from 1997 to 2002, the accumulated loss was greater than the combined inflow of foreign direct investment (FDI) and borrowed foreign debt during the same period.
To address the alarming loss of capital, the
CCP announced in January 2007 that foreign exchange trading by Chinese citizens would be limited to $50,000 annually. In addition, it
became illegal for people to carry excessive amounts of foreign currency out of the country
($5,000 and above); transfer funds by means of “ants moving,” i.e., in small batches to avoid detection; underground banking; and virtual currencies.
It was during this period the CCP began cracking down on China’s underground banking activities. The SAFE website states that from 2017 through 2021, its policing exposed over 300 cases of forex trading through underground banks and investigated over 6,000 illegal foreign exchange cases.
In
2021 alone, SAFE investigated over 2,400 cases of foreign exchange violations, uncovered over 90 underground banks, and dealt with over 1,800 cases of trade partners of underground banks.
Thus far in 2022, SAFE has reported two batches of illegal foreign trading. The first occurred
in January involving two businesses and 10 individuals. They collectively engaged in underground bank trades totaling $43.7 million and were fined $4.9 million collectively.
The second batch occurred on
April 2 involving 10 individuals. They were fined $345,000 for $2.5 million in illegal foreign trades. Three of the trades were through underground banks, while seven were via the offshore gambling locations of domestic merchants.
Loopholes Exposed in China’s Foreign Exchange Policies
Mike Sun, a North American investment consultant familiar with China, told The Epoch Times that after the CCP tightened its foreign exchange trading policies, businesses and individuals began transferring more money out of China through underground banks. In turn, this prompted the CCP to step up its crackdown on underground banks.
However, an article The Epoch Times published on February 27, exposed a loophole in the new controls.
Frank T. Xie, a business professor with the University of South Carolina said the CCP’s tightened controls applied to only a few officials and ordinary people. Exempt from the controls are China’s 500 most powerful families that have the means to conduct huge trades using “open and honest” means to move money overseas rather than relying on underground banks. These “unregulated” people really control China’s economy.
To illustrate, said Xie, “These powerful families can transfer large sums of money in seemingly normal transactions by acquiring companies in the United States, especially high-tech companies. Then they modify the purchase price to $150 million from the actual $100 million.”
According to Sun, the CCP can limit some outflow of capital but strict crackdowns have the potential to accelerate the outflow problem, he said, “because the more you control it, the more the people will panic, especially the corrupt officials.”
Commenting further on the challenges the CCP faces, Sun said, “Underground banks are hard to control, and there are many other ways for capital outflow besides the banks. For example, funds can be transferred through Hong Kong and Macau, or through money transfer companies or foreign trade companies. The CCP’s corrupt officials have lots of ways of doing this.”
CCP Policies and Loophole Accelerate Capital Flight
The Epoch Times also obtained the opinions of
Henry Wu, a Taiwanese political and economic commentator. He said, “Since the CCP cracked down on Chinese stocks in the U.S., capital outflow from China has accelerated, and the Hong Kong stock market, Hang Seng Technology Index, and Shanghai Stock Exchange Index have been falling. Another corroboration is that China’s trade surplus last year was
$676.4 billion, but foreign reserves only increased
$33.6 billion, indicating a massive capital flight.”
As to why capital outflow had accelerated, Wu says, “The capital outflow is related to the trade war between China and the United States, the uncertainty of the CCP’s policies, and how the outside world views the CCP’s unconstrained power. These are why foreign investors have lost confidence in China’s economic outlook.”
In addition, Wu said, “The Fed’s interest rate hike will also cause capital outflow from China. With the outflow of capital to the United States, China will have a difficult time attempting to retain its capital unless the CCP raises interest rates.”
This is in reference to how the yield on U.S. 10-year Treasury bonds rose 2.76 percent while China’s yield remained at 2.75 percent. This was the
first time this inversion occurred since 2010 and is indicative of the
flight of capital from China that is happening despite the CCP’s enhanced policies to regulate foreign exchange trading.
Joyce Liang contributed to this article
