According to reports, mainland Chinese citizens have only a $50,000 annual foreign exchange quota, and capital control rules explicitly prohibit using it to buy offshore real estate or securities directly; violators could have their quotas revoked or carry criminal liability, but certain non-indirect channels are able to invest. For the average middle class, exploiting loopholes is just a way to make more money; for the wealthy, overseas assets are a way to protect their wealth.
- Overseas accounts
A prerequisite for spending money abroad is an offshore account, which is legal but sometimes tricky. Chinese banks set high thresholds for opening accounts in Hong Kong, such as China Minsheng Bank, which requires clients to deposit 300,000 yuan within three months, and Chinese banks are often stricter when checking the use of foreign exchange quotas. After obtaining an overseas account, to buy Hong Kong stocks one simply deposits funds into a brokerage account, and even though each step is legal, overall everyone is in breach of the initial foreign exchange purpose commitment.
Hao Hong, chief strategist at CBI, said most people who move their money abroad do so in pursuit of higher investment returns, especially the urge to participate in overseas IPOs of emerging technology companies.
Risks: While Communist Party regulators have so far turned a blind eye to the practice, the foreign exchange regulator is still considering whether residents should be allowed to buy overseas stocks directly, and if officials decide to crack down, they may put violators on the regulator’s watch list and deny foreign exchange quotas for three consecutive years and conduct anti-money laundering investigations.
- P2P
Another popular option for those who want to avoid attention via cross-border transfers, or raise the limit on remittances to more than $50,000, is P2P. 2 unnamed industry sources said some Hong Kong insurance agents have turned into underground money changers, charging a fee to provide services to those who need local dollars.
The risk: Besides falling into a fraudulent trap, the biggest threat is potential criminal liability. According to CCP Supreme People’s Court documents, disguised fraudulent trading of foreign currency or foreign exchange transactions can lead to criminal convictions, but there are no details on which types of transactions are classified as such.
- Virtual Currencies
Based on the decentralized nature of the blockchain, cryptocurrencies its difficult to track and are the ideal conduit. The first step is to use a VPN to jump off the CCP network and set up a crypto trading account. To deposit into an account, most people buy Tether USDT in RMB, which is backed by the equivalent amount of USD and therefore accepted as a payment method by many crypto platforms, and can then use the Tether USDT token to trade other currencies and remit the proceeds to an overseas bank account.
Risk: The trouble is that the Chinese Communist authorities are aware that virtual currencies are on the rise and difficult to stamp out. There are no officially recognized virtual currency exchanges in mainland China, and cryptocurrencies are still active for illegal purposes such as money laundering, and any funds suspected of such activity could trigger the freezing of overseas accounts.
- M&A actions
For the truly wealthy or corporations, there are ways to raise the purchase price by arranging to pay more for the overseas assets, with the seller paying the difference as an advisory fee to a middleman, which can be deposited into the buyer’s offshore account. Shen Meng, a director at Beijing-based investment bank Chanson & Co. points out that intangible assets such as intellectual property are perfect acquisition targets because there is plenty of room to overbid.
Risk: Mainland China has stepped up scrutiny of overseas acquisitions due to concerns about systemic risk. While the move is mainly aimed at large companies, everyone could be brought under control.
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