Laundering money by gambling it in Macau junket rooms would be one of the most expensive ways for Chinese citizens to get cash out of mainland China, says a report from brokerage Sanford C. Bernstein.
The report ‘A Beginner’s Guide to Avoiding Chinese Capital Controls’, examines whether the appetite of Chinese consumers to move wealth offshore is entering a new and more intense phase because of fears regarding the Chinese economy. It concludes it is not, but says that some recent uptick in activity could be linked to fears of further devaluation of the Chinese currency – the renminbi – against the U.S. dollar.
The report estimates that the total amount of foreign currency exiting China each month for the past three months has been “something in the range of US$100 billion”.
“We think a sudden flee[ing] of capital that would exhaust China’s foreign exchange reserve is unlikely,” stated the nine-strong team of analysts, led by the brokerage’s strategist Michael Parker and including senior analyst Vitaly Umansky.
The authors then go on to examine 12 methods of moving money out of China, a country where officially the capital account is closed to individual citizens for all but the most modest outward transfers of cash. The brokerage says the list of cross border transfer methods it has identified as nonetheless being used by some of those citizens is by no means exhaustive.
“Given the number of channels, we believe that currency outflow is more a function of sentiment than opportunity,” stated the authors.
After noting that mainland Chinese citizens are individually limited to transferring the equivalent of US$50,000 in foreign exchange per year, where it estimates the cost would be approximately 1.3 percent of the principal, the brokerage says that short of personally smuggling money over the border – which it describes as having “no real cost, but [is] limited by size and risk of confiscation” – the most important channel is “match-making” by underground banks.
Under these arrangements, currency traders identify individuals with renminbi in China that wish to convert that renminbi into foreign currency and move it out of China and individuals with foreign currency outside China that wish to convert that foreign currency into renminbi in China.
The brokerage stated: “The two parties simply transfer funds though some combination of escrow accounts monitored by the ‘bank’. The underground bank collects a fee. In perhaps the most elegant part of the arrangement, foreign currency reserves in China are not altered.” The cost of such activities is typically 1.3 percent of the principal, estimates Sanford Bernstein.
At the other end of the scale, suggests its report, moving money by laundering it via casino VIP play is “prohibitively” expensive.
The authors state: “When VIP players utilise junkets, junkets expect players to play in the casinos … Junkets are required to reach a minimum volume of rolling chip sales in a month, and they make profit by virtue of players’ losses (as junkets share net win with casinos).”
“By our estimate, each [H.K.] dollar provided by the junket to a player is rolled 5 times to 7 times on a casino table (in many instances even more). The expected loss in a baccarat game based on this rolling multiple (and factoring in player commissions) can be approximately 12 percent to 22 percent-plus of the buy-in principal amount,” they added.
The brokerage says its calculations are based on the theoretical loss to the player per “roll” of 2.85 percent, less 0.5 percent to 0.8 percent of rolling chip volume as commission sometimes paid to VIP players.
“We believe junkets are a rather prohibitively expensive means to transfer money out of China, in relation to other alternatives available, and we do not believe it makes economic sense to use casino junkets to transfer money out of China,” said Sanford Bernstein.
Nonetheless a recent study into the Macau junket sector by academics from the City University of Hong Kong suggested that in cases where gambling funds have been obtained illicitly – including by corruption – then laundering via gambling in VIP rooms might have been considered a viable option. It is an option that looks increasingly risky, given the reports of increased scrutiny of the segment as part of China’s anti-corruption campaign, according to investment analysts.
Sanford Bernstein noted that one previously common and cheap way for Chinese to move money cross border – including for gambling in Macau – was via “fake” transactions using bank cards issued by China UnionPay Co Ltd (i.e., involving purchase of high value goods such as jewellery for instant refunds for cash); a process that would cost 2 percent to 5 percent of the principal. But it noted that method was now subject to tighter controls by the Macau authorities and those in China.
The brokerage indicated that it was likely that the closing of one loophole would simply lead Chinese citizens to seek others.
“Markets being efficient – the greatest volume of cash is likely to go through the cheapest channel. Once that channel is exhausted, the market will move on,” noted the authors.
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