Page 2 of
2 China sees red over black
money By Olivia
Chung
accounts from home and
overseas and withdraw it as yuan, seriously
affecting banks' normal services and
inconveniencing other clients, the official said.
Quoting central bank figures, the reports
said Shenzhen had attracted large amounts of the
country's cash in circulation since 2001 because
of such illicit activities. In the first nine
months this year, the city alone absorbed half of
China's total cash circulation
of
195.6 billion yuan.
China Central
Television (CCTV) on November 15 followed up with
an exclusive report saying officials had moved to
close down an underground bank in Shenzhen
allegedly run by a Hong Kong woman, To Ling, that
had handled at least 4.3 billion yuan in illegal
money transfers between Shenzhen and Hong Kong in
the past 17 months. Its clients from across the 31
mainland provinces included some large state-owned
enterprises, CCTV said. Some units of oil giants
PetroChina and China Petroleum and Chemical Corp
were on a list of To's clients seized by
authorities, the Economic Observer later claimed.
More than 235 million yuan was pumped into
Hong Kong's stock and property markets through
To's underground bank over the past year, CCTV
said. The timing of its report, more than four
months after To's case was uncovered in June, was
seen as significant. The belated high-profile
coverage was read as a message that the Chinese
government was unhappy with the continued illegal
outflows of large amounts of cash to speculate in
Hong Kong's stock and property markets.
A
China Securities Journal commentary further made
it clear that China did not want to see the mature
and "rational" Hong Kong stock market become like
the mainland's volatile A-share market, with gains
driven by short-term speculative money. Hong
Kong's benchmark Hang Seng Index gained more than
40% since August to more than 31,000 at the end of
October. The series of mainland media reports last
week helped to drag down the index to Monday's
close of 27,460 before a 311-point turnaround on
Tuesday.
If Shenzhen officials expected
the central government to lavish public praise on
their move to curb depositor withdrawals, they
would have been disappointed. "We do not agree
with such restrictions," Premier Wen Jiabao said
while visiting Singapore at the start of the week.
China's commercial banking regulations guarantee
the freedom of money withdrawals by depositors.
Wen also said the banks should have clearly
informed the public about any change in their
services before taking action.
Following
Wen's remarks, the PBoC's Shenzhen branch is now
considering lifting the restrictions. But the
premier also made it clear that China could no
longer tolerate money flowing into Hong Kong from
the mainland via underground banks. "If the issue
of illegal fund outflows is not handled properly,
financial stability on the mainland and Hong Kong
will be affected," he said.
Billions of
yuan have long been funneled into Hong Kong from
the mainland through unofficial channels. At one
end of the scale, mainlanders have been reported
to have handed over bundles of banknotes from
suitcases to buy stocks and housing in the former
British territory. At the other extreme,
state-owned enterprises are believed to supply the
great proportion of the speculative funds. With
the onset of a Beijing-led crackdown, they will
have to call back their funds, suppressing the
Hong Kong stock market, at least in the short
term.
Beyond the threat to the economy,
illegal fund outflows also jeopardize Beijing's
plan to gradually open the gate to legal outbound
investment, analysts say.
The government
this year expanded the scope and quota size of its
qualified domestic institutional investor program,
which allows residents to join funds for
investment in overseas capital markets,
particularly Hong Kong with its heavy
concentration of mainland-focused stocks. The
presence of large quantities of illegal funds
driving up the Hang Seng Index would cause any
rational fund manager to think more than twice
before joining the same market, analysts say.
This is one reason the government has put
a brake on the so-called "through-train" program
that would allow individual mainlanders to
directly trade in Hong Kong stocks. Beijing is
afraid that they too would be victims if the
market took a sharp downturn.
From this
perspective, analysts say, Beijing's campaign to
crack down on illegal activities is to support the
legal outflow of funds for the healthy long-term
development of the Hong Kong stock and property
markets.
Olivia Chung is a
senior Asia Times Online reporter.
(Copyright 2007 Asia Times Online Ltd. All
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