Pedestrians walk past a money exchange booth in Hong Kong. (Photo : Getty Images)
China's currency regulator has stopped underground banking operations that involved more than 1 trillion yuan ($148 billion) following a crackdown on illegal capital outflows, according to Bloomberg.
Zhang Shenghui, an official of the State Administration of Foreign Exchange (SAFE) said that the agency also seized $8.43 billion in foreign exchange funds as part of its nationwide operation on illegal outflows.
Earlier his year, foreign exchange settlement and sales in three banks were suspended by SAFE, after they failed authentication procedures.
In a statement, SAFE said that to maintain the stability of the foreign exchange market, they will continue monitoring unusual cross-border capital flows and prevent the operation of underground banks.
The report said that China's move reflects its desire to diversify money out of the country and expresses its determination to prevent outflows that affect the country's currency and drove more capital flight.
Since the People's Bank of China devaluated its currency in August last year, the Chinese yuan has depreciated 7.8 percent against the U.S. dollar, and more recently, 1 percent.
"As regulators tighten the formal channels, underground activities seem to be heating up," Raymond Yeung, chief greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong, noted.
China has made repeated efforts to prevent the weakening of the yuan, which included increasing the offshore yuan borrowing costs in Hong Kong.
The report however, said that some Chinese investors have turned to creative ways to spirit money of the country such as buying life insurance policies in Hong Kong, hiding tourist spending abroad, and faking trade invoices. The decline in yuan deposits in offshore banks also showed that the demand to get money into other currencies increased.
Amid the growing demand for foreign currency, several banks have cautioned that capital outflows could be larger as expected. Deutsche Bank AG warned that in the next few months, the outflows would intensify while the economic growth slows and the yuan weakens.
Goldman Sachs Group Inc. analysts noted that the amount of capital getting out of the country in yuan, rather than in dollars, has increased.
According to official data, about $27.7 billion in yuan payment have left the country in August, despite the stabilization of the Chinese currency and low net foreign-exchange purchases.
MK Tang, Hong Kong-based senior China economist at Goldman Sachs, however said that the large cross-border movement of money cannot be explained by market-driven factors, which must be considered when measuring currency outflows.
From $133 billion in the previous three months, the illegal flows have increased to $246 billion in the third quarter of the year, according to Iris Pang, senior economist for Greater China at Natixis SA in Hong Kong.
Since February, the country's reserves have been around the $3.2 trillion level, after dropping to $323 billion in over four months.
China however, is far from a currency crisis as it has enough defenses and little vulnerability, according to Bloomberg Intelligence economists Tom Orlik and Fielding Chen.
"From Mexico in 1994 to Turkey in 2001, crisis countries had a combination of high foreign debt, insufficient FX reserve buffers and limited policy space," the two economists said. "On those metrics, China looks relatively secure."
