Capital flight crackdown would hurt outside China

July 10, 2014

By Peter Thal Larsen

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

A Chinese crackdown on capital flight would be felt around the world. The government has long tolerated some cash finding its way around the country’s financial border controls. If Beijing decides to plug the leaks then banks, casinos and overseas property markets would suffer.

Many Chinese citizens have found ways to circumvent rules that prevent them from taking more than $50,000 out of the country each year without regulatory approval. Now there are signs the authorities are fighting back. State broadcaster CCTV on July 9 accused Bank of China (BOC) of helping clients launder money using a pilot programme designed to facilitate cross-border transfers of the Chinese currency.

BOC denies the allegations and says its programme is legitimate. Nevertheless, it seems unlikely that one state-controlled entity would so brazenly attack another without a nod from higher officials. Besides, there are other signs that China is tightening up: Macau recently moved to restrict the use of mainland credit cards in the gambling enclave.

A campaign against Chinese capital flight would initially hit banks. Hong Kong lenders last year reported almost 33,000 suspicious transactions in the former British colony – a 41 percent increase. However, banks have so far escaped any serious punishment. That might change if China followed the example set by U.S. regulators and imposed large fines on institutions that helped clients break the law – particularly if the cash belonged to officials caught in the mainland’s anti-corruption drive.

Macau casinos, a favoured way to beat capital controls, would feel the pinch, as would purveyors of jewellery and luxury goods which are an alternative to transporting cash. Cities from Sydney to San Francisco would also feel a shortage of Chinese property buyers. Mainland investors spent $22 billion on housing in the United States last year, accounting for almost a quarter of foreign sales, according to the National Association of Realtors.

It’s far from clear how far China is willing to go to enforce its capital controls. For a large trading economy, restrictions on the movement of money are bound to be leaky. Besides, Beijing’s long-term aim is to make the yuan convertible. In the meantime, though, the beneficiaries of China’s capital flows are vulnerable to any crackdown.

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