China Targets Four Key Areas to Fight Illegal Capital Outflow

Yicai

2016-12-12

(Yicai Global) Dec. 12 – Chinese authorities have focused their efforts to limit capital outflows on four key areas, insiders said. The two cities with the highest levels of openness in China, Shanghai and Shenzhen, are at the forefront of these efforts to prevent the recent rise in capital outflows, which they claim have been prompted by economic transition in the country.

The first area of focus is to control capital outflows to Hong Kong's insurance industry. In recent years, a large number of mainlanders have bought insurance policies in Hong Kong. Insurance premiums paid in the first half of this year alone reached HKD30.1 billion (USD3.87 billion), a year-on-year increase of 116 percent. By using a UnionPay overseas credit card to pay insurance premiums, customers were able to cleverly circumvent the annual purchase limit of USD50,000. This has raised eyebrows among Chinese regulators, and consequently, China UnionPay had to completely suspend its support for the payment of Hong Kong insurance premiums from October this year.

Secondly, Chinese authorities target what is called false trade, a process of showing false documents for virtual export and import while, in fact, large amounts of money is deposited in the opposite end of the alleged trade transaction without any trade actually taking place. Due to its location adjacent to the Chinese mainland, Hong Kong is the most popular destination for capital flight. False trade has become the most common and most popular path for capital outflows. In February this year, the mainland's imports from Hong Kong increased 89 percent, due in good part to this phenomenon. The State Administration of Foreign Exchange (SAFE) is said to be aware of the problem and officials said strict measures will be taken to prevent transfer of financial resources using current accounts. They will also monitor future trade between the Chinese mainland and Hong Kong more closely.