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| Would Papa Smurf approve of PRC cash smurfing? |
Here's wishing one and all a Happy New Year! Just as 2015 ended, 2016 begins with questions for the world economy that hinge on the fate of China. By now everyone knows that commodity exporters--coal, oil, steel, you name it--have suffered as the so-called commodity supercycle led by Chinese demand has dissipated. Another side effect of China's economic slowdown has been a steady and massive exodus of cash that wants to exit the PRC. Any way out, it goes, baby! Whereas expectations during years of high growth were that the yuan would appreciate because of higher interest rates in the future to cool the economy down, you have the opposite phenomenon today. Not only is China cutting interest rates, making the yuan less attractive, but further depreciation is expected to help boost the PRC's export competitiveness.
In theory, China has among the world's strictest capital controls. In practice, there are all sorts of ways to bypass these controls. Two that I wish to highlight here are (i) parallel systems in PRC and Hong Kong where no money is actually transferred and (ii) good ol' "smurfing":
(i) Those familiar with remittance methods--I wrote an entire paper on them once--will be familiar with the "hawala" system. It works roughly like this: a customer first deposits yuan in to a mainland China account. To work around capital controls, there is no actual transfer of money made to Hong Kong. Rather, the equivalent amount in HKD is credited to a newly-opened account in Hong Kong:
In Hong Kong, more than 1,200 currency-exchange shops have seemingly little daily activity. These brightly lit storefronts specialize in helping wealthy Chinese transfer their money overseas. The premium isn’t high — only about 1,000 yuan ($160) per HK$1 million ($130,000) more than bank exchange rates would be if they could do the transaction.
It works like this: Chinese come to Hong Kong and open a bank account. Then they go to a money-change shop, which provides a mainland bank account number for the customer to make a domestic transfer from his or her account inside China. As soon as that transaction is confirmed, typically in just two hours, the Hong Kong money changer then transfers the equivalent in Hong Kong or U.S. dollars or any other foreign currency into the client’s Hong Kong account. Technically, no money crosses the border -- both transactions are completed by domestic transfers.
(ii) There is also "smurfing" in which friends, relatives and all manner of intermediaries move cash across borders in small amounts so as not to hit the upper limits of transferring large amounts:
The practice is called “smurfing” - named after the little blue cartoon characters who collectively make up the whole. Also known in Chinese as “ants moving their house,” for small grains of dirt being moved individually, the government has started restricting the amounts of cash that can be moved in this way, as well as how often banks can send money to a single account abroad from multiple sources.
There are more methods mentioned in the excellent Bloomberg article, but the overall message is clear: PRC residents are finding all sorts of clever ways to elude capital controls, driven by the expectation that keeping money onshore will only resort in further losses.
http://www.bloomberg.com/news/features/2015-11-02/china-s-money-exodus
http://www.bloomberg.com/news/articles/2015-11-01/china-unfazed-by-record-capital-outflows-steps-up-market-reform
