SHANGHAI • China said it cracked the nation's biggest "underground bank", which handled 410 billion yuan (S$91 billion) of illegal foreign-exchange transactions, as the authorities try to combat corruption and rein in capital outflows that have hit records this year.

The official People's Daily, citing police officials, reported on Friday that more than 370 people have been arrested or face lawsuits or other punishments in the case centred in eastern Zhejiang province. The case has brought the total for underground banking and money-laundering activities to 800 billion yuan since April, the newspaper said.

The state-run Xinhua News Agency said separately that the probe began in September last year and the police took almost a year to sort through more than 1.3 million suspicious transactions. Xinhua said the authorities froze more than 3,000 bank accounts.

The case highlights the nation's struggle to control capital outflows that have helped to send real estate prices soaring from Vancouver to Sydney - even when Chinese citizens are officially limited to converting US$50,000 (S$70,600) of yuan a year.

Some people may be moving the proceeds of corruption, while others may be concerned about the outlook for the economy and the potential for the yuan to weaken.

"The government wants to stem outflows and stabilise the yuan's exchange rate, but the outflows cannot be stopped unless people change their expectation on yuan depreciation," said Professor Xi Junyang of the Shanghai University of Finance and Economics. Besides illegal banking operations, "a lot of money is leaving the country by legal means."

China's capital outflows may have climbed to a record US$194 billion in September before cooling to US$62 billion last month.

BLOOMBERG