China's rich move money out of country, joining capital exodus

Travellers waiting to check in at Shanghai Hongqiao International Airport. To work around the country's cash controls, people in China are asking friends or family members to carry or transfer out US$50,000 each.
Travellers waiting to check in at Shanghai Hongqiao International Airport. To work around the country's cash controls, people in China are asking friends or family members to carry or transfer out US$50,000 each.PHOTO: BLOOMBERG

HONG KONG • As the Chinese economy stumbles, wealthy families are increasingly trying to move large sums of money out of the country, worried that the value of the currency will fall and their savings will be worth less.

To get around the country's cash controls, individuals are asking friends or family members to carry or transfer out US$50,000 (S$70,000) each, the annual legal limit in China. A group of 100 people can move US$5 million overseas.

The practice is called "Smurfing", named after the blue, mushroom- dwelling cartoon characters, and it is part of an exodus of capital that is casting doubt on China's economic prospects and shaking global markets. Over the last year, companies and individuals have moved nearly US$1 trillion out of China.

Some methods are perfectly legal, like investing in real estate elsewhere, buying businesses overseas and paying off debts owed in dollars. Others, like "Smurfing", are more dubious and, in certain cases, outright illegal.

Chinese Customs officials caught a woman last year trying to leave the mainland with US$250,000 strapped to her chest and thighs and hidden inside her shoes.

If the government cannot keep citizens from rushing to the financial exits, China's outlook could darken. The swell of outflows is a destabilising force in China's slowing economy, threatening to undermine confidence and hurt a banking system that is struggling to deal with a decade-long lending binge.

The capital flight is putting significant pressure on China's currency, the yuan or renminbi.

The government is trying to prevent a free fall in the currency by stepping into the markets and tapping its huge cash hoard to shore up the yuan. But a deep erosion of the reserves may set off further outflows and create market turbulence.

China is also trying to put the brakes on outflows by tightening its grip on the country's links to the global financial system. The government, for example, has just started to clamp down on people's use of bank cards to buy overseas life insurance policies.

UnionPay International, a government-controlled bank card company, recently announced that it would start strictly enforcing a pre-existing but widely ignored limit on overseas insurance purchases of US$5,000 a year per card.

Such moves have trade-offs. The limits create concern that the government is pulling back on reform efforts that China needs to keep growth humming in the decades to come. But the near-term pressure also requires serious attention, given the global shock waves.

"The currency has become a very near-term threat to financial stability," said Ms Charlene Chu, an economist at Autonomous Research.

Navigating such problems is fairly new for China.

With growth slowing, money is gushing out of the country. And the government has a looser grip on the spigot because China dismantled some currency restrictions to open up its economy in recent years.

"Companies don't want renminbi and individuals don't want renminbi," said Mr Shaun Rein, founder of the China Market Research Group. "The renminbi was a sure bet for a long time, but now that it's not, a lot of people want to get out."

The Chinese central bank is fighting the downward pressure by purchasing large sums of yuan, selling dollars from its currency reserves to do so.

China's reserves sank by US$108 billion in December and an additional US$99 billion last month, to US$3.23 trillion. A year and a half ago, they stood at US$4 trillion.

The government has been cutting interest rates to stimulate the economy, making it less attractive for savers to keep their money in the country.

Mr Ronald Wan, a Hong Kong money manager who is on the boards of numerous state-owned enterprises in mainland China, said pessimism was becoming the consensus. "Among the companies I have been in contact with," he said, "all of them have the intention of moving money out of the country."

In this environment, many banks and economists expect another sharp devaluation this spring. But the Chinese government has denounced predictions of any further erosion of the yuan.

NEW YORK TIMES

A version of this article appeared in the print edition of The Straits Times on February 15, 2016, with the headline 'China's rich move money out of country, joining capital exodus'. Print Edition | Subscribe