China Cracks $64B ‘Underground Bank’ Moving Money Abroad(bloomberg.com)
bloomberg.com
China Cracks $64B ‘Underground Bank’ Moving Money Abroad
http://www.bloomberg.com/news/articles/2015-11-20/china-cracks-64-billion-underground-bank-moving-money-abroad
48 comments
Couldn't you just use bitcoin? Good exchanges exist in China. LocalBitcoin works too, though it's more work to convert $50K.
Escrow.com does not use bitcoin because of US anti-money laundering regulations and since that was the chosen escrow party the deal fell through (they insisted on using Escrow.com, not me). The next suitor did work out and they too used Escrow.com so I'm pretty happy with Escrow.com and I'm not sure that I'd trust a party that would flaunt US law to handle deals that size with any reliability. After all, they could have their accounts frozen at any moment. When you're in for the long haul it pays off to play by the book.
I guess what he meant was why not convert to BTC, then BTC/USD exchange, then non-Chinese bank so they can pay you.
Which non-Chinese bank would that be? The party on the other side would have had to have a bankaccount abroad already and in that case they probably would have held the funds abroad if they could have.
You know what, they can, and that's why it's worth it for some people to spend more on buying bitcoin miners, than they'll ever get from using those miners to mine bitcoins.
We'll know if/when China is actually successful in stemming capital outflows because we'll see it reflected in real estate prices in tier 1 North American cities.
I have a friend who works for a commercial real estate development firm in Boston. They just finished a new apartment building in the BC/Fenway area and the lowest tier 1-bedroom studio (550 sq ft) is going for $3500/mo. He said they had the building fully let out within a month of opening, mostly to international students. He declined to specify nationality.
Most of my friends that have tried to buy a house in the San Francisco Peninsula have been outbid by Chinese paying 110%,with cash.
Someone posted a link here saying only 10% of houses were sold to chinese investors, meaning not enough to influence the bids.
It's more than 10%. Many Chinese buy via LLCs which makes ownership impossible to determine. I work with one HOA board in Seattle where 50% of the units are now owned by Chinese investors. They are debating whether to pass a restriction on renting out units (limited to some % of total units, and you have to join a waiting list until new spots open up). This type of restriction eliminates investors but immediately drops market value by 20%. Similar to the co-op system in NYC. Talk to a high volume realtor in SF, LA, Seattle, or NYC and you will hear directly from them how many foreign buyers are influencing the market.
10% of transactions is enough to dramatically influence real estate prices. They become comps for subsequent sales.
It's a good point that prices in many countries are driven domestically (Australia!), however, I'd add/counter two arguments:
- there's a few papers out there (alas, I don't have them) that show that you can go as low as 4% active investors and still have an efficient market (although I'm not sure to what extent this extends to real estate purchases);
- even if the Chinese were not to touch real estate and stuck to treasuries, massive demand for treasuries would lower the cost of capital for everything else and therefore drive all asset prices (including and especially real estate) through the roof.
FWIW we recently went to visit some houses in Sydney, and 90% of those doing the tours were non-English-speaking Chinese. About half the agents were also Chinese, some with limited English skills. Anecdotes, not data, etc.
- there's a few papers out there (alas, I don't have them) that show that you can go as low as 4% active investors and still have an efficient market (although I'm not sure to what extent this extends to real estate purchases);
- even if the Chinese were not to touch real estate and stuck to treasuries, massive demand for treasuries would lower the cost of capital for everything else and therefore drive all asset prices (including and especially real estate) through the roof.
FWIW we recently went to visit some houses in Sydney, and 90% of those doing the tours were non-English-speaking Chinese. About half the agents were also Chinese, some with limited English skills. Anecdotes, not data, etc.
Also from what I'm seeing winning bids in this market are at least 120-130%
Ditto in Cambridge, MA. Very frustrating for a number of my friends trying to buy a house.
I have a friend who is on a condo board on the Peninsula who has been claiming that tighter outflow controls have been affecting purchases since around April. I've been curious about whether this is just his perception or reflective of a broader trend.
Exactly right. But given the demand in those cities from non-Chinese buyers I expect it would take a while to see it actually reflected in prices. In the Bay Area at least there is also a lot of Russian money in the real estate market so it might mitigate some of the effect as well.
Real estate prices are extremely responsive to very small changes in demand. Chinese buyers compose the majority of international buyers in most investment markets. I see the ownership makeup of several 200+ unit HOAs where we are allowed to get insight into LLC ownership. If Chinese buyers quit buying my estimate is that San Francisco prices would fall by 10%. There are just not many domestic buyers at current prices. If the most recent wave of Chinese investors liquidated properties acquired since 2011, the market falls another 10%; although that's unlikely because they tend to have a buy and hold forever mentality. What surprises me the most about the current market is the fact that rents have been able to rise so much without hitting a harder affordability ceiling.
From what I've heard (realtor friend), the Russians prefer LA to SF. Sure, there's a "little Russia" in the Richmond district, but there aren't too many Russians interested in the Bay Area (unless they're working for Tech in the area, of course).
Interesting cultural insight about Chinese money preferring SF while Russian money prefers LA.
Is it really true that Chinese money prefers SF? Chinese money definitely loves LA, perhaps its impact is just more pronounced on a smaller city like SF?
My knowledge on this is purely anecdotal, I'd love to see some data.
For every buyer there is also a seller. Usually, with real estate that seller goes on to buy more real estate (or if they were a developer, build more buildings). It will take quite a while for prices to drop because the market is not entirely Chinese buyers.
If you've lived through previous real estate cycles you know that prices can move very fast, especially to the down side. It would probably take 2 out of 3 of the following in order to trigger this in the Bay Area: meaningful interest rate hikes, market crash/tech firings, foreign money meaningfully drying up. One of the three would cause a slowdown but 2/3 causes the next real dip. It might not happen in the next couple years but it will happen at some point (''this time it's different'' - no). I don't know what you mean by ''usually'' but I'll say that about 30% of the Bay Area sellers I see move into other similar property (as evidenced by the filing of 1031 tax documents) and 70% either cash out an investment property and take the cash (almost all inherited properties fit in this bucket since the tax basis is market value and there is no tax due) or sell their primary home and move to a LCOL. I personally have no problem with foreign buyers participating in the market but we should incorporate this information into the debate about how to handle land use, zoning restrictions, and land taxation in the future (e.g. if foreign investors become a major ownership group in California, presumably residents would be in favor of higher property/land use taxes).
Maybe the time has come for China to move to a freely convertible currency. It seems to work ok for most of the rest of the developed world.
> It seems to work ok for most of the rest of the developed world
https://en.wikipedia.org/wiki/1997_Asian_financial_crisis
The Asian financial crisis kicked off because Thailand tried to maintain a fixed exchange rate and then was unable to because too many people were trying to change Bhat into foreign currency and they'd run out so let the Bhat half in value in a panic. Then people who had foreign debt and had counted on changing Bhat to make the repayments couldn't and defaulted. Had they floated a bit earlier before things got hairy they might have been ok.
Limiting capital outflow to $50000 per person seems like an effective way to keep well off people trapped in your country.
While there are still millionaires in China who would prefer to live somewhere else, new 'banks' will spring up to help them. Morally this doesn't even belong on the same level as other banking problems around the world.
Well much of this is the proceeds of corruption, so yes they do want to keep them in the country.
Now I know that this is more of a tax than a ban, the proceeds of corruption bit sounds more likely. No one likes to tell the government about their undeclared income.
You can get the money out, at a %age.
That sounds more reasonable, do you know the rate?
http://www.bloomberg.com/news/features/2015-11-02/china-s-mo...
Has it at .1% or thereabouts over the normal banking rates (but normal banks can't do it).
Has it at .1% or thereabouts over the normal banking rates (but normal banks can't do it).
Well that "industry" could start to use cryptocurrencies.
Anyone foolish enough to put 64 billion dollars into cryptocurrencies does not need to be in charge of 64 billion dollars.
Yeah. Cryptocurrencies are not on the radar of anyone transacting even a few orders of magnitude less than this. I'm not sure why the Party chose to expose this ring right now but someone up-to-date on PRC politics certainly will be able to fill us in on what triggered this event.
Undoubtedly, this has been going on for a long, long time. My friends wife made a ton of money selling "old money" houses to the Chinese-New-Rich in affluent suburbs of New England. I'm sure those on the West Coast heard similar stories re: Vancouver and it's property boom as a result of the same demographic.
This is just like any 'raiding the coffers' situation by an incumbent power. A destabilizing event occurs (the fall of the USSR, the laxer economic policies within the PRC, the overthrow of the Shah, the US profiteering off cocaine for arms, etc). The fall of the USSR led to a few, well-connected dozen families getting rich off the oil money to the point of casually buying UK football teams.
You can be 100% assured that there will be some scapegoats taking a fall, a fewer number of people in the party will be asked to fall on the sword. I'd bet money that this is just another orchestrated sacrifice to business-as-usual. We'd have to get access to all those MNC-bank records to really figure out how much expatriated yuan left for other markets.
For the time being, they'll just effectively tender IOUs until the dust settles[1]. It's been happening since before the modern economies emerged (Dutch coffee shops and Lloyds Underwriting ship insurance is arguably that point). Investment banks still trade amongst themselves in a similar fashion.
[1]https://en.wikipedia.org/wiki/Hawala
Undoubtedly, this has been going on for a long, long time. My friends wife made a ton of money selling "old money" houses to the Chinese-New-Rich in affluent suburbs of New England. I'm sure those on the West Coast heard similar stories re: Vancouver and it's property boom as a result of the same demographic.
This is just like any 'raiding the coffers' situation by an incumbent power. A destabilizing event occurs (the fall of the USSR, the laxer economic policies within the PRC, the overthrow of the Shah, the US profiteering off cocaine for arms, etc). The fall of the USSR led to a few, well-connected dozen families getting rich off the oil money to the point of casually buying UK football teams.
You can be 100% assured that there will be some scapegoats taking a fall, a fewer number of people in the party will be asked to fall on the sword. I'd bet money that this is just another orchestrated sacrifice to business-as-usual. We'd have to get access to all those MNC-bank records to really figure out how much expatriated yuan left for other markets.
For the time being, they'll just effectively tender IOUs until the dust settles[1]. It's been happening since before the modern economies emerged (Dutch coffee shops and Lloyds Underwriting ship insurance is arguably that point). Investment banks still trade amongst themselves in a similar fashion.
[1]https://en.wikipedia.org/wiki/Hawala
Maybe a TPP side-deal with one of the places the money is being moved to?
I'd just assume they move a limited amount at a time and wait for it to be exchanged for "real" money on the other side before they "send" the next transfer.
The combined value of all bitcoins is only $4 billion. It would be impossible for this to happen unless the price of Bitcoin increased something like 100x.
Bitcoin may float to any valuation.
Certainly. And if you believe Bitcoin will become a major way that Chinese evade capital controls, then you should invest in Bitcoin for a 100x return. Clearly the market doesn't currently believe that this will happen or the price would already be much higher.
You're right - the yuan trades at a discount in bitcoin.
Right. The main use of Bitcoin is now getting money out of China. That's why the Bitcoin exchanges in China do so much volume. The PBOC cracked down on this once, and Bitcoin fell from over $1000 to $250. Now, as of November 2015, it's apparently possible to do yuan transfers within China to at least one Bitcoin exchange, which is pushing the price back up. There was a brief spike to $500 when that suddenly became possible, but the price dropped rapidly back to $320 or so. Unclear why the PBOC hasn't plugged that hole yet, but they probably will.
Bitcoin mining is also a way to get yuan out of China and into another currency. Bitcoin mining doesn't violate China's capital controls; it's considered manufacturing and exporting. That's encouraged in China.
Bitcoin mining is also a way to get yuan out of China and into another currency. Bitcoin mining doesn't violate China's capital controls; it's considered manufacturing and exporting. That's encouraged in China.
The main use of bitcoin in China is getting into the MMM Ponzi scheme,which is a huge fraud. Getting money out of China is done by other means, like $64bn underground banks.
Wasn't HSBC already included in a massive fraud somewhere else? Should they not be seriously sued for that kind of thing?
> Wasn't HSBC already included in a massive fraud somewhere else?
I believe HSBC gained immunity by paying a token fine and promising not to do it again.
No the $1.9 billion fine was in relation to specific charges in Mexico, and does not give immunity against anything else.
Do you have any information about ongoing prosecutions of HSBC?
Apparently there is a trick to this where people inside China with lots of US$ will pay a premium to some party that has dollars on the other side of the line. So this $50K maximum has created quite the little black market, probably the opposite of what it intended (capital flight from the Country). But it seems to be 'ok' as long as the right people profit from it.