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China steps up controls on capital outflows via UnionPay

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Has a new insurance policy

In April last year when Hong Kong’s stock market was in euphoric overdrive, a short story from the Shenzhen Special Zone Daily went largely unnoticed: a woman had been arrested by police for trying to smuggle Rmb1.6 million ($245,000) worth of foreign currency into Hong Kong. Wrapping the notes around her breasts and thighs, she had been in and out of the territory more than 90 times in the fortnight before she was caught.

The newspaper also reported that underground money exchanges had hired thousands of “ant-like movers” to smuggle cash over the border and that this illegal flow had helped to fuel the spectacular surge in Hong Kong stocks (see WiC277).

The Chinese government has since stepped up efforts to crack down on the underground banks. From April to the end of last year, police unearthed 170 cases of illegal fund transfers or money laundering involving more than Rmb800 billion, the People’s Daily has reported. Coincidentally, Hong Kong stocks have retreated more than 25% during the period.

The police and customs aren’t fighting the battle alone. In another move to stem capital outflows, China’s dominant credit card issuer UnionPay said last week it would also crack down on mainland Chinese buying insurance policies overseas.

Under existing rules mainland Chinese can convert no more than $50,000 per year and send it abroad. But large numbers of people have been getting around the controls by swiping their bankcards at insurers such as AIA, Prudential and Manulife in Hong Kong, as well as the local units of some of China’s own state-owned insurers.

Offshore insurance policies have been seen as an effective way to transfer yuan savings into assets denominated in Hong Kong and US dollars. Purchases of insurance policies by mainland visitors to Hong Kong reached HK$21.1 billion ($2.7 billion) between January and September last year, following a 64% surge in 2014, according to the city’s industry regulator. UnionPay’s clampdown implies that some of that channel has now been closed. The bankcard issuer says that purchases of insurance products overseas with its plastic will now be capped at $5,000 per transaction.

Chinese investors might still bend the rules, the Apple Daily newspaper predicted, by breaking up a $500,000 policy into multiple transactions.

Yet the news still spooked Hong Kong’s stock market, which fell more than 2% in the session following UnionPay’s announcement. The Hong Kong-listed shares of AIA also tumbled.

China Daily has reported that Chinese financial regulators are likely to unveil more measures to plug capital outflows, which reportedly hit $150 billion in January alone. One of the proposals under consideration is to further delay the Shenzhen-Hong Kong Stock Connect scheme, which would allow investors in the two cities to invest in each other’s stock market.

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