For years, wealthy Chinese have been transferring billions worth of their money overseas, snapping up pricey real estate in markets including New York, Sydney and Vancouver despite their country's currency restrictions.
Now, one way they could be doing it is clearer. Last week, when China Central Television leveled money-laundering allegations against Bank of China, the state-run broadcaster's report prompted the revelation of a previously unannounced government program that enables individuals to transfer their yuan and convert it into dollars or other currencies overseas.
Offered by some banks in the southern province of Guangdong, across the border from Hong Kong, the trial program was introduced in 2011 for overseas property purchases and emigration and doesn't constitute money laundering, Bank of China said in a July 9 statement.
The transfers were allowed by regulators and reported to them, the bank said.
"What it shows is the government has been trying to internationalise the renminbi for a lot longer than we thought," Jim Antos, a Hong Kong-based analyst at Mizuho Securities, said by phone, using the official name for China's currency and referring to policy makers' long-stated goal of allowing the yuan to become freely convertible with other currencies.
"I'm rather encouraged by this news because this is the way they need to go."
Currency controlsChina's foreign-exchange rules cap the maximum amount of yuan that individuals are allowed to convert at $50,000 each year and ban them from transferring the currency abroad directly. Policymakers have taken steps in recent years, including allowing freer movements of capital in and out of China, as they seek to boost the global stature of the not-yet-fully convertible yuan.
"There's a silver lining in this incident as it may force the regulators to address the issue in a more open and transparent way," Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group, said by phone. "This is an irreversible trend."
The issue came to light after CCTV said Bank of China helped customers transfer unlimited amounts of yuan abroad through a product called Youhuitong, which means "superior foreign-exchange channel."
Positives, negativesThe program is another sign that China is testing methods to allow outward yuan flows before full convertibility, May Yan, a Hong Kong-based analyst at Barclays, said by phone. The goal has been announced by policymakers since the 1990s, and is a step toward stated plans to make Shanghai a global financial capital by 2020.
"For an experiment, you want to see if there's any positives or negatives," Yan said. "When the bank or the regulators can accumulate that experience, then they will decide if they want to move forward, or broaden it or shut it down."
The central bank in February unveiled rules to make it easier for companies with operations in Shanghai's free-trade zone to move yuan in and out of the country, a further loosening of controls on currency flows. The yuan surpassed the euro as the world's second most-popular currency in trade finance in 2013, according to the Society for Worldwide Interbank Financial Telecommunication.
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The Guangdong branch of China's currency regulator, the State Administration of Foreign Exchange, picked Bank of China, China Citic Bank and a foreign lender to let individuals transfer yuan abroad in a trial the banks were told not to promote, Time Weekly reported in April 2013. A Beijing-based Citic Bank press officer declined to comment on the program.
$3.2 billion estimateWhile Bank of China didn't provide figures, the 21st Century Business Herald estimated the lender has moved about 20 billion yuan ($3.2 billion) abroad through Youhuitong, citing people with knowledge of the trial program. "Many commercial banks" in Guangdong offer a similar service, Bank of China said in its statement, without naming them.
On CCTV's website, the report on Bank of China hasn't been viewable since at least July 12. Monday, the story link led only to a series of advertisements. A spokeswoman for CCTV's international relations department, which handles foreign media inquiries, didn't immediately respond to an emailed request for comment on why the story wasn't available.
PBOC stanceThe People's Bank of China and SAFE didn't reply to requests for comment. The central bank is "verifying" facts related to media reports of bank money-laundering, the official Xinhua News Agency reported July 10, citing a PBOC spokesman.
A delegation from Bank of China which was due to visit Frankfurt this week to discuss issues including a planned yuan clearing service in the city has canceled the trip amid the controversy over the CCTV report, the newspaper Handelsblatt reported today, without citing anyone.
Youhuitong has been suspended while the PBOC and its anti-money laundering bureau request records of all previous transactions, according to a person familiar with the product, who asked not to be identified because he wasn't authorised to speak publicly.
Transfer approval for Youhuitong customers usually takes several weeks to a month, the person said. They need to provide documents showing how the money to be transferred was obtained, such as tax-payment receipts and proof of income, as well as a property-purchase agreement or proof of emigration, he said.
Preventing abuseYouhuitong customers would typically deposit yuan with Bank of China at least two weeks before the transfer, the person said. Once approved, the customer and the bank agree on an exchange rate before the funds are moved to an overseas account designated by the customer, he said. Money destined for real estate would go directly to the property seller's account to ensure the cash won't be misused, he said.
A Beijing-based press officer for Bank of China declined to comment. Industrial & Commercial Bank of China and China Construction Bank, the nation's two largest banks, declined to comment on whether they offer similar products.
HSBC Holdings, which runs the largest branch network among foreign banks in China, offers its Chinese clients another way to access offshore mortgages while avoiding the cap on foreign-exchange conversion, according to a person familiar with the mechanism, who asked not to be identified without having authorisation to speak publicly.
Local lawsCustomers deposit yuan with HSBC's mainland unit or purchase its wealth-management products, and the bank's overseas branch then issues a foreign-currency denominated mortgage using the China deposits as collateral, the person said.
"We seek to abide by the rules and laws of the jurisdictions and geographies in which we operate," said Gareth Hewett, a Hong Kong-based HSBC spokesman.
Affluent Chinese have been moving money overseas in search of greater investment returns. China's benchmark stock index has tumbled 66 per cent from its 2007 record, while the government has clamped down on property lending to rein in rising prices.
Chinese buyers, including people from Hong Kong and Taiwan, spent $22 billion on US homes in the year through March, up 72 per cent from the same period in 2013 and more than any other nationality, the National Association of Realtors said in its annual report on foreign home purchases.
'Mainland money'"Clearly the property market wouldn't nearly be so robust as it is today without mainland money," Mizuho's Antos said. "How did they do it? With Bank of China's help. There has been a tremendous amount of mainland money flowing offshore and it couldn't have happened without" official approval.