Three Chinese banks have temporarily suspended a yuan remittance service
over suspicion of money laundering, according to a Wall Street Journal report.
Last week, China Central Television (CCTV) accused Bank of China (BOC), China’s fourth largest lender, of allowing wealthy Chinese citizens to circumvent the country’s controls on cross-border transfers by exploiting an obscure remittance program called You Hui Tong. Launched on a trial basis two years ago by the People’s Bank of China (PBOC), the program allowed a few approved banks, including BOC, ICBC and China CITIC, to begin offering cross-border yuan remittance services for individuals through their branches in the southern province of Guangdong. The PBOC deliberately kept the trial quiet, people familiar with the matter told WSJ.
Under current rules, Chinese individuals are not allowed to move more than US$50,000 out of the country annually. But according to CCTV, BOC was allowing wealthy clients to transfer unlimited amounts of yuan overseas and convert it to other currencies. CCTV said that in some cases, the bank even worked with immigration agents to help customers disguise the origins of the funds. The bank has denied all allegations.
The PBOC is now investigating the case. Meanwhile, BOC, Industrial and Commercial Bank of China Ltd (ICBC) and China CITIC Bank Corp. have all halted the service.
“The program itself is neither illegal nor improper as it’s been approved by the central bank, but the question is if any particular bank has gone too far by offering clients services they are not supposed to,” a senior executive at a Beijing state-owned bank said. “We all had to put a brake on it before the central bank draws a conclusion from its investigation.”
BOC could not be reached for comment. But a BOC employee who preferred not to be named confirmed to Reuters that the bank had halted the remittance service
. “The bank understands that there are management and risk control issues with the program, especially in relation to the junior employees involved,” the source said.Impact on trade with China?
The PBOC is not expected to withdraw the trial program altogether, as it is part of Beijing’s initiative to promote the use of the yuan/renminbi overseas. However, some analysts believe that halting the program could at least momentarily stifle the Chinese government’s reform efforts. “This action highlights the tension between the benefits of easing restrictions on capital flows and the risks of allowing freer movement of capital in the absence of effective regulation of financial institutions,” Eswar Prasad, a China scholar at Cornell University, told WSJ.
However, Alfred Nader, vice president, Latin America and the Caribbean for Western Union Business Solutions, and a frequent AFP commentator on trade with China, believes that this latest investigation could actually serve as a positive for renminbi trade. “While this ‘secret experimental’ program looks to be shut down for now, I believe this could serve as the impetus for the Chinese government to loosen the reins on the renminbi,” he said. “In China, where there is a will, there is a way, and it’s time for these restrictions to be done away with and allow more freedom in the movement of money across borders. Commercially, the renminbi is being adopted in all corners of the globe as an easier alternative to the USD. Now, it’s simply time for the Chinese to say, ‘Ok, it’s time,’ and set the renminbi free.”
He added that Chinese citizens have been purchasing property in the U.S., Canada, Australia, Hong Kong, etc. for the last decade—property that was often in the millions of dollars when the Chinese law was very clear about the US$50,000 limit. “It made me pleased to see CCTV report on something that I felt was a direct skirting of this law,” he said.
Karl Schamotta, director, FX strategy and structured products for Cambridge Mercantile Group, agreed that the investigation is unlikely to slow the renminbi’s ascendancy as a worldwide trading currency. “Chinese policymakers always consider private capital flows distinct from trade-related transactions, and this crackdown is clearly oriented toward the former,” he said.
However, for the renminbi to become a global reserve asset, it must meet the basic requirements that all major currencies possess. “It must function as an internationally accepted medium of exchange, a unit of account, and a store of value,” Schamotta said. “In other words, the capital account must be opened up—and this is a sign that Chinese policymakers are unwilling to accelerate the process. Reserve currency status remains a distant prospect.”
Schamotta also believes this incident raises a question that many investors should be asking themselves: “Why are Chinese citizens trying so hard to move money out of the country, while so many Westerners are trying to move it in?”