Underground Banks in China Helping People to Move Money during Present Economic Uncertainty

Published By : 27 Oct 2015 | Published By : QYRESEARCH

With China’s weakening economy and turbulence in the stock market, many Chinese are trying to move money offshore. The Chinese government has put a cap on transferring money offshore with the help of licensed banks. This has led to the development of a vast underground offshore-remittance and currency-exchange network. The middlemen are trying to move amount much higher than the prescribed limit out of China while charging an increased fee. Though no official data track these underground money transfers, central-bank officials estimate that the underground banks handle transactions worth US$125 billion or more per year.

The unusually high activity in underground banks has been pointed out by a drop in China’s foreign exchange reserves. The reserves dropped by US$93.9 billion in August and US$43 billion further in September. Though the fall in foreign exchange reserves was also due to the selling by central banks to support yuan, the high activity in underground banks cannot be overlooked. These underground banks run from tea shops and convenience stores while catering to a range of clients– middle-class Chinese trying to buy overseas property or corrupt officials. All the clients believe that their money is safer overseas, generating higher returns. 

The Chinese Ministry of Public Security has started its campaign against these underground banks. In June this year, Shenzen police raided an underground bank and arrested 31 people. The police also seized 1,087 accounts holding 12 billion yuan. With direct remittances being scrutinized by the authorities, the underground networks are depending on their family and village ties. No money is physically crossed over the border. Middlemen give the underground bank a sum, and a matching sum appears in Hong Kong, minus a cut in the range of 0.3-3%.

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