Capital Flight from China

Lots of money is escaping China’s porous capital controls

The man who calls himself Jack is a caricature of a small-time gangster. Sporting a chunky Louis Vuitton belt, a gold necklace and gold-rimmed sunglasses, he chomps on a Cuban cigar. He says he has come to a pawnshop across the street from the Ponte 16 casino in Macau, a gambling Mecca and former Portuguese colony that is administered separately from the rest of China, only for its fine Cohibas. But when asked for advice about how to exchange yuan held within China for foreign currency—a transaction officially limited by China’s capital controls—he breaks into a laugh and flashes a Chinese bank card. “Just swipe it,” he says. “However much money you have in your China account, you can transfer it here.”

[Read the full text here, at The Economist]

Macau’s role as an illicit way station to move cash out of China, away from the government’s prying eyes, is nothing new. In recent months, though, things have been busier than normal. Capital outflows were already on the rise because of worries about the economy. During the summer, after the stockmarket crashed and the government let the yuan weaken, they soared. Official data indicate that more than $150 billion of capital left China in August—a record (see chart).

Faced with this exodus, the government launched a crackdown on underground banks, which run money across borders and arrange for matching onshore and offshore transactions. Police raided Macau’s pawnshops and arrested 17 people for laundering money. That appears to have slowed things down. When your correspondent visited pawnshops in Macau this week and asked whether they could help him shift 1m yuan ($157,000) out of China—three times what one can legally withdraw in a year—most demurred. Read the rest of this entry »