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China Says $64b ‘Underground Bank’ Exposed

China Says $64b ‘Underground Bank’ ExposedChina Says $64b ‘Underground Bank’ Exposed

China said it cracked the nation’s biggest “underground bank,” which handled 410 billion yuan ($64 billion) of illegal foreign-exchange transactions, as the nation tries to combat corruption and rein in capital outflows that have hit records this year.

More than 370 people have been arrested or face lawsuits or other punishment in the case centered in eastern Zhejiang province, the People’s Daily reported on Friday, citing police officials. The case brought the total for underground banking and money-laundering activities to 800 billion yuan since April, the newspaper said.

The probe began in September last year and the police took almost a year to sort through more than 1.3 million suspicious transactions, the state-run Xinhua News Agency reported separately. The authorities froze more than 3,000 bank accounts, Xinhua said.

The case highlights the nation’s struggle to control capital outflows that have helped to send real-estate prices soaring from Vancouver to Sydney–even when Chinese citizens are officially limited to converting $50,000 of yuan per year. Some of the money may come from corrupt officials trying to protect their assets as the government clamps down.

A suspect identified as Zhao Mouyi set up more than 10 companies in Hong Kong from 2013 and transferred more than 100 billion yuan through so-called non-resident accounts, which are used by offshore companies in China when they are transferring money abroad, the newspaper said.

  Account Loopholes

Taking advantage of a “loophole” relating to non-resident accounts, which has since been filled by banks, Zhao circumvented the capital controls by directly transferring yuan overseas and then exchanged the money into foreign currencies at banks including HSBC Holdings Plc in Hong Kong, the People’s Daily said. Zhao then allegedly transferred it to his clients’ accounts, the report said, citing the local police.

HSBC declined to comment on the report.

“This is just an attempt to reduce the capital outflow pressure since this keeps the money in the country,” said Hou Wei, a banking analyst at Sanford C. Bernstein & Co. in Hong Kong. The government is “determined and very serious” about defending its currency reserves and the exchange rate, the analyst said.

In another case highlighted by the People’s Daily on Friday, an investigation of an underground bank in Fujian this year uncovered a network spanning Hong Kong, Taiwan, Australia and Saudi Arabia–and a senior executive at a state-owned enterprise who allegedly tried to move 18 million yuan abroad, the newspaper said.

China has been tightening control over capital flows even as it pledges to remove its currency controls and make the yuan fully convertible by 2020. An Aug. 11 devaluation of the yuan and the central bank’s introduction of a more market-driven fixing spurred the currency’s biggest monthly tumble in two decades.

Financialtribune.com