China’s hot money triangle flourishes

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 outside shops where thick wads of Chinese 100 yuan ($16.31) and 1,000 Hong Kong dollars ($130) bank notes change hands and shuffle through counting machines. Licensed as liquor and dry goods stores, 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 television.

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 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 30 years ago.

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

In Zhuhai alone, over 1 billion yuan is transferred daily through underground networks, according to a poll of six agents - 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.

“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. “Chinese banks in Hong Kong are basically a black hole, even now.”

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 black spot.

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, according to people with knowledge of the rules.

Reuters