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Shenzhen offers way out for Chinese yuan

Customers exchange currencies illegally at a shop in Shenzhen, China, on Thursday. Many shops in the city offer illegal money transfers to Hong Kong to avoid strict currency controls and trade in Hong Kong stocks. PHOTO: AFP

In his grocery store near the Hong Kong border, a man surnamed Zheng sells the usual products: cigarettes, tissues, drinks and snacks. But he also offers a very different kind of service.

Behind his counter is a drawer filled with stacks of banknotes. Zheng is one of a number of traders operating illegal foreign exchange services in this city and he makes no attempt to hide it.

"A lot of people choose to come to us rather than the bank because we offer much more favorable exchange rates," he said. "I have many clients who come to me with millions of yuan; they can save a lot of money trading with me."

Zheng also offers an underground money transfer service in which yuan are exchanged for Hong Kong dollars and deposited in Hong Kong bank accounts.

The cash is then taken out in Hong Kong and used to make investments in the city's stock market, which has boomed in recent months, partly on the back of such illicit activity.

It's no coincidence that Zheng's shop lies on a route used by thousands of Hong Kong and Chinese cross-border travellers every day. He has a steady stream of customers, both individuals and companies, who eschew the bank nearby.

Five other stores near Zheng, including a pharmacist, offer the same services, indicating strong demand.

Such illicit traders are flourishing as cash-rich Chinese, facing limited investment opportunities, search for ways to make their savings grow -- sparking huge capital flows into Hong Kong.

Authorities launched a crackdown last month, limiting cash withdrawals from Shenzhen banks and ATMs in a bid to stem the flood of illegal money out of the mainland and into Hong Kong's bullish stock market.

Chinese police also busted a rogue Shenzhen bank that allegedly handled transactions totaling 4.3 billion yuan (US$581 million) in 18 months, serving investors from 31 provinces and cities.

Billy Mak, an associate professor of Hong Kong Baptist University's finance department, said underground banks have existed for many years, particularly in Shenzhen because of its proximity to Hong Kong.

But billions more are believed to have been poured into Hong Kong stocks through underground channels since August, when officials began touting a scheme to allow Chinese to invest directly in Hong Kong stocks for the first time.

The project has apparently since stalled -- but not before the Hong Kong bourse soared a staggering 40 percent.

Experts estimate 5 percent of the Kong stock market's turnover comes from mainland individuals.

Lu Xiongwen, dean of the school of management at Shanghai's Fudan University, said the expanding Chinese middle-class is no longer happy with regular income from their jobs and the small returns from bank deposits.

So they are striving to boost their savings with new investments, Lu said.

An HSBC survey released last week found 42 percent of the middle classes in Guangzhou, Shanghai and Beijing invested in property, while 34 percent ploughed money into China's unpredictable stock market.

"Some people have money but there are not many ways to invest so they seek opportunities not only in Hong Kong but also overseas to expand their wealth," Lu said.
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