Despite curbs, China’s vast hot money triangle flourishes

Despite curbs, China’s vast hot money triangle flourishes

4:59pm EDT

By James Pomfret and Matthew Miller

ZHUHAI, China/HONG KONG (Reuters) – In an underground mall just a stone’s throw from China’s teeming border with Macau, a row of 30 small shops with identical golden plaques does a brisk, though shadowy trade with mainland Chinese visitors, many of them bound for the gambling hub.

“Good rates. Better than the banks,” shout salespeople jostling to usher clients into shops where thick wads of Chinese 100 yuan ($16.31) and HK$1,000 ($130) bank notes change hands and shuffle noisily through electronic cash-counting machines. Licensed as liquor and dry goods stores with stacked shelves of rice wine and cigarettes, many conduct their real business in back rooms – as underground bankers and remittance agents.

“It’s very simple,” said one agent surnamed Choi, dressed in sandals and ripped jeans, as he served tea in a back office where larger transactions are typically carried out. “You give me renminbi here. Then we deliver Hong Kong dollars to you in Macau. We can move tens of millions each day,” he said, glancing up at six security camera images of his shop front flickering on a flat-screen TV.As China’s economy and financial markets mature and gain in sophistication, so too does a vast underground banking industry offering swift, cheap and low risk cross-border fund transfers – shifting hundreds of millions of dollars each day. Much of that activity is conducted openly on the streets of southern China’s Guangdong province, where businesses and individuals depend on underground networks to get around strict currency controls – both for legitimate commercial purposes and to safeguard assets beyond the reach of authorities.

Beijing is finding it increasingly difficult to stem the tide of speculative and illegal cash. In the decade since China began cracking down on money laundering, the government has amended its criminal laws and strengthened commercial banking rules, but loosening restrictions on capital transfers has made it easier for hot money to be channeled across the border.

“China’s financial markets are not that mature,” said Yu Yongding, an economist at the Chinese Academy of Social Sciences and former adviser to the central bank. “There are lots of capital controls that certainly have contributed to these kind of activities, while corruption and money laundering also play an important role.”


In affluent Guangdong in the Pearl River Delta, cities like Zhuhai, Shenzhen, Guangzhou and Dongguan are major underground conduits for Chinese hot money. The province, where imports and exports amounted to $984 billion last year – a quarter of China’s foreign trade – has served as a portal for capital flows since China’s economic opening over 30 years ago.

Collectively, the cities form part of a giant, unregulated underground banking triangle between China, the world’s gambling capital of Macau and the global financial hub of Hong Kong.

In Zhuhai alone, over 1 billion yuan ($163 million) is transferred daily through underground networks, according to a straw poll of six agents who spoke to Reuters – part of a tight-knit group of 100 operating in the border area.

“Our business has gone up some 30 percent in the past three years,” said one who gave his name as Li.

Besides retail-level agents clustered around the borders at Zhuhai and nearby Shenzhen, another deep-rooted echelon of shadow bankers exists across Guangdong out of public view, often working from secret offices, with deals conducted between trusted, well connected parties, often with just a phone call.

“I went to see a friend in this business once. It was just a tiny 100 square foot room filled with banknotes. Can you imagine how much money there was?” said a Hong Kong businessman surnamed Chan who has run a factory in Guangdong for over 20 years. “They’re everywhere. In every village, town and city.”

The Washington-based Global Financial Integrity group estimated about $2.83 trillion flowed illicitly out of China from 2005 to 2011, with Hong Kong the largest recipient.

“The enormity of money laundering right now is a problem,” said a senior law enforcement official in Hong Kong, who asked not to be named given the politically sensitive nature of his comments as a public official. “Chinese banks in Hong Kong are basically a black hole, even now.”

Yan Lixin, secretary general of Fudan University’s China Centre for Anti-Money Laundering Studies, reckons more than a third of the capital moving through underground banking channels is dirty money being laundered. “According to the statistics within my scope and my own experience, it’s approximately 30-40 percent at least,” he said. “The situation is going from bad to worse.”

Much of the unofficial flows of capital into and out of the triangle of Guangdong, Hong Kong and Macau, facilitate trade and investment in the key economic region, businessmen say.

Illegal cross border bank remittances can be used to wire extra capital into China to buy raw materials or cover wages during peak periods. “It just takes 15 minutes, but official approval can take two weeks,” said an electronics factory boss in Dongguan who often uses underground banks. He didn’t want to be named to avoid disrupting business ties with such agents.

Unlike other shadow banking systems in eastern coastal regions like Zhejiang, Jiangsu and Wenzhou that tend to collect deposits and extend high interest loans to small businesses starved of credit, Guangdong’s underground banks tend to play the greatest role in black money transfers abroad, says China’s central bank.

A People’s Bank of China (PBOC) anti-money laundering report from 2007 said nearly one third of China’s illegal private banks originated in Guangdong. In 2009, police shut down over 40 underground banks in Fujian, Jiangxi and Guangdong provinces, according to a report in the official People’s Daily, involving 100 billion yuan. “Underground banks serve as an important channel for money laundering and illegal foreign exchange desks,” it wrote.

In the most recent public statistics available, 970 money laundering cases were investigated in China in 2009, involving 301 billion yuan. Guangdong was cited as a major blackspot.


China’s new leader Xi Jinping has pledged to crack down harder on corruption and financial crimes like money laundering. The central bank issued new anti-money laundering rules to financial institutions in December, requiring them to rate clients’ risks based on where they are and the kind of business they do, people with knowledge of the rules have told Reuters.

In an internal 2008 PBOC anti-money laundering report leaked on the Internet, it said that since the mid-1990s, 16,000-18,000 Communist party officials, businessmen, CEOs and other individuals had “disappeared, carrying about 800 billion yuan.”

The government controls capital inflows, bars underground banking and unauthorized remittances, and limits individuals’ capital outflows to 20,000 yuan ($3,300) a day. Under Macau banking and gaming laws, alternative remittance systems are illegal and suspicious transactions must be red flagged and reported to the Macau Financial Intelligence Office.

Yet such capital flows flourish largely unchecked.

Part of the difficulty for China has been figuring out how to control an industry that provides a pressure valve for capital seepage as Beijing mulls further capital account opening and full yuan convertibility. The State Council, China’s cabinet, has said it would issue an operational plan this year to achieve full convertibility of the yuan and establish a comprehensive system for outbound investment.

That may take some time, said Yu Yongding, the economist.

“China has to solve so many problems. Capital account liberalization should not be treated as a priority,” he explained. “You shouldn’t abolish laws just because they’re difficult to enforce.”

Authorities also don’t want to quash an industry that’s funneling credit to smaller firms, said Yan of Fudan University, whose centre is approved and supported by the PBOC’s anti-money laundering bureau. Punishing underground banks may be at odds with local governments wanting development and stability.

“Crackdowns will impact the local economy,” said Yan.


“There’s always a gap in China between policy and practice,” said one businessman in Zhuhai who deals regularly with Chinese officials. He did not want to be named because of the sensitivity of the issue. “If they shut down the money changers, others will just crop up elsewhere. They’re too smart.”

Writing a six-digit VIP account number on a piece of paper, a remittance agent in Zhuhai said clients could use this to withdraw funds in chips or cash from most casinos in Macau, which raked in $38 billion in annual gaming revenues last year, fuelled by cash-rich Chinese gamblers.

“It operates like a bank. You can take money in and out at any time,” Li, the remittance agent said. “It’s safe.”

In a high-roller VIP suite at a major casino in Macau where baccarat tables were placed between two giant aquariums filled with bright reef fish, people queued at six counters, some holding slips of paper with an account number and a monetary amount written on them.

One man, in a grey hoodie, holding such a slip, handed over his passport and was given a stack of eight, oblong HK$500,000 gambling chips. He didn’t have his own account, he said, but had arranged the transfer through a remittance agent.

“In peak periods you can always see some mainland Chinese bringing maybe 1 or 2 million yuan in cash … taking the lift to the 20th floor and then taking Hong Kong dollars back down,” said a Macau-based academic specializing in VIP room operations, who asked not to be named given the fear of reprisals by powerful figures in the highly lucrative industry. “This only happens when they feel comfortable with the environment. That’s something that is quite common.”

Typical VIP rooms in Macau run by junkets – middle men who bring in Chinese punters and extend credit – maintain cash reserves or working capital of at least 100 million yuan ($16.3 million), the academic said, with cash transfers tending to take place in hotel rooms or outside, away from surveillance cameras.

Choi said he and other Zhuhai agents regularly transfer millions of yuan directly into VIP room gambling accounts in Macau casinos. Bank wire transfers can also be arranged, though larger amounts would need to be staggered over a week, with a maximum of 500,000 yuan daily to reduce the risk of detection.

“There must be a lot of money laundering,” said Choi. “But we’re not criminals … We’re just making life more convenient for people. We just move the cash.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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