China’s underground-bank crackdown risks headaches in nearby Hong Kong

Business is good, but Dickson Chan is worried. The Hong Kong money changer saw remittances from mainland China increase by 10 percent to 20 percent last month from the end of 2016, yet he is not sure how long the operation can last. The company he works for, Professional Foreign Currency Exchange Ltd., helps clients move cash between China and Hong Kong with a bank account in each place by squaring opposing transactions.

“Now people feel that the Chinese government may tighten capital controls further and it wants more yuan depreciation, so many clients want to transfer money to Hong Kong more quickly,” Chan said from his store, located in the basement of a drab mall in Causeway Bay, the world’s second-priciest retail district. “We’re worried the Chinese government will introduce some regulations to ban this business, so now although we’re still doing it, we’re trying to raise revenues from other currencies.”

The fate of Hong Kong’s money changers shows both the reach of Chinese authorities, and the limits to their power. While a determined crackdown could kill the industry, such a response would risk spooking China’s citizens and exacerbating outflow pressures. The exodus of funds from Asia’s largest economy has spurred three years of yuan depreciation, that at times ,roiled global markets and influenced monetary policies worldwide, and pushed up asset prices in cities from Hong Kong to Vancouver.

An estimated $1.8 trillion has left Asia’s largest economy from the start of 2015 through January 2017, as the yuan lost almost 10 percent and returns on onshore assets dropped amid slowing economic growth. To stem the flows, the authorities have tightened capital curbs, stepping up scrutiny of residents’ foreign-currency purchases and limiting insurance buying in Hong Kong.

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