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China’s Currency Black Market

Posted by Author on November 26, 2007

A woman’s arrest sheds light on how the Chinese evade currency controls

The Economist, Nov 22nd 2007-

HONG KONG- SINCE a police raid on her firm was broadcast on Chinese state television, To Ling has emerged as one of China’s more intriguing financiers. The 43-year-old Hong Kong resident operated a black-market foreign-exchange business with an outlet in Hong Kong, four branches on the mainland, and a client list that included China National Petroleum and Sinopec, two state-run monoliths. Her firm handled transactions worth more than $1m a day. Now she has landed in jail.

The crackdown on her operations in mid-November has exposed how hard it has become for the Chinese authorities to keep a tight rein on capital flows. Chinese citizens, with well honed trading instincts, have spotted a glaring arbitrage opportunity: subsidised petrol on one side of the border that Hong Kong residents want to get their hands upon, and cheap shares in Hong Kong, compared with their mainland counterparts, that Chinese investors want to buy. Officially, both are off limits to the other. That is where Ms To stepped in, providing the currencies both communities needed to do deals.

The publicity given to the raid was clearly meant to be a deterrent. As part of the November crackdown under instructions from the Shenzhen branch of China’s central bank, limits were placed on cash withdrawals to stop illicit funds from being carried over the border. Wen Jiabao, the prime minister, acknowledged on November 19th that vast amounts of currency were flowing out of China through illegal channels, about half from Shenzhen. This, he said, threatened the stability of both China and Hong Kong.

But what else can China expect? Its economy is increasingly integral to world trade, and benefits enormously from it. Yet it has foreign-exchange controls befitting an insular country, and pressures are mounting to get around them. Hesitantly, the government has sought to establish mechanisms, such as limited rights for Chinese fund managers to invest abroad, that would allow funds to seep out of the country. But they have not come to much.

In August the idea was floated to allow people in Tianjin, a Chinese municipality, to invest in Hong Kong shares, the so-called “through train.” Hong Kong share prices immediately soared. But the proposal has since stalled because of the complicated logistics involved. Hong Kong share prices have retreated as a result, and had a particularly bad time after the announcement that cash withdrawals from Shenzhen would be capped.

There are other ingenious ways of side-stepping the authorities. One is transfer pricing, involving the export of products from China at a particularly low price to a friendly and lightly taxed country (such as Singapore or Hong Kong), and then re-exporting them at a higher price to a third destination.

Another is via the gambling dens of Macau. Meanwhile, the gradual climb in the value of the yuan against the Hong Kong (and American) dollar has made it a more credible currency, and it is now accepted in parts of Hong Kong. Eventually, that will make firms such as Ms To’s redundant. But publicity stunts such as her arrest are like trying to catch the wind with a butterfly net.

Original report from The Economist

One Response to “China’s Currency Black Market”

  1. yeah..nice article… hope many people can understand how profitable fx trading is but please aware from many scam site or broker who always looking for stab u… peace..

    wow.. i dont even know about forex blackmarket.. how it works?

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