China will step up its crackdown on foreign currency crimes, including underground banking, to safeguard “national economic and financial security”.
The State Administration of Foreign Exchange said on Monday that it worked with police to raid roughly 100 underground banks involving “hundreds of billions of yuan” and arrested more than 100 suspects last year.
This year the foreign currency regulator would wage the campaign with “even greater enthusiasm” to punish operators and clients of underground banks helping Chinese move their money overseas. It would also clamp down on illegal activities under the guise of “innovation”.
The announcement suggests that there is unlikely to be any relaxation in China’s draconian capital account controls, even though the yuan has strengthened to a two-year high against the US dollar.
From January 1, account holders can withdraw a maximum of 100,000 yuan (US$15,000) a year in total overseas from their Chinese bank accounts, rather than the previous 100,000 yuan allowable from each account.
In China, each person can change up to US$50,000 in foreign currencies a year, with any amount beyond that requiring special permission.
The Chinese government also bans mainland residents from buying overseas securities or properties directly apart from via designated channels such as the Hong Kong-Shanghai stock link, forcing many residents to turn to money brokers, or underground banks, to send funds abroad.
Underground banks facilitated an exodus of cash from 2014 to 2016, with China shedding about US$1 trillion in its foreign exchange reserves.
The administration said it and the police would track money flows in illegal deals to uproot “criminal networks” and use both “criminal” penalties such as imprisonment, and “administrative ones” such as fines, to punish those who dared to flout Beijing’s capital account controls.
The Chinese leadership has made preventing financial risk a top priority for the next three years. Capital outflow had been regarded as a major threat but a series of tighter capital controls, coupled with a weakening US dollar, halted the exodus.
In December, China’s forex reserves climbed for the 11th straight month to US$3.14 trillion, the highest level in more than a year.