Massive fund outflow challenges China’s forex management

Massive fund outflow challenges China’s forex management

Staff Reporter

2013-05-15

The influx of hot money and outflow of funds via various channels in China underscores the increasing challenge to the country’s foreign exchange management system, reports the Beijing-based China Economic Weekly. According to Jones Lang LaSalle, a multinational real estate service firm, overseas commercial property investments by Chinese investors have jumped by 33% last year to US$4 billion and may reach US$5 billion by the end of this year. The investments coincide with an increase of Chinese nationals choosing to emigrate, a group which totaled more than 150,000 people in 2011. The huge amount of funds flowing out of the nation via various channels are reportedly due to the official restriction on outward forex remittance, which is capped at US$50,000 per person a year. The People’s Bank of China, aware of the futility of efforts to stem the outflow of money, recently summoned representatives from a number of foreign banks, including HSBC, Citibank, Standard Chartered, and DBS, to discuss the establishment of a system governing offshore investments by Chinese nationals, the China Economic Weekly said. The government also discussed the issue during a meeting of the National People’s Congress Standing Committee on May 6, and will now aim to monitor cross-border fund movements, which currently evades government inspection. Liu Jinchuan, a financial expert, said that underground channels for fund outflows include underground financiers, assets transferred via trade and investment, money laundering via offshore casinos and offshore bank cards. There are many brokers for overseas investments in Shenzhen, on the border with Hong Kong, with many of them operating as local underground financiers, the paper said. Adi (pseudonym), a money broker, said that the State Foreign Exchange Administration, while capable of controlling the cross-border movement of large amounts of funds, is powerless to regulate the movement of smaller amounts of money, equivalent to several millions or tens of millions of renminbi. Adi said he can remit funds out of the country within half an hour of receiving notice from his clients, for which he charges a fee of 0.8%-1.5%, adding that the transfer of large-scale funds can be carried out in installments. Chinese investors have also been funneling funds abroad via foreign trade, such as bloating import prices or underreporting export prices, especially in the case of hi-tech products. The underground outflow of funds via foreign-trade channels explains in part the increase of Hong Kong’s export value, which shot up by 74.2% year-on-year to US$105.6 billion in the first quarter of this year, much higher than its import figures.