December 20, 2016 3:00 pm JST

Soft yuan, ad hoc policy push money out of China

Public evades curbs via insurance, bitcoin as regulators play whack-a-mole

YUSHO CHO, Nikkei staff writer

SHANGHAI -- As the yuan's slide against the dollar continues, individuals in China are using a variety of channels to get money out of the country, while authorities' efforts to stem the bleeding are only making matters worse.

A 40-something Chongqing resident flew to Hong Kong with his family for the National Day holiday Oct. 1. But this was more than just a vacation. Leaving his wife and children at the hotel pool, he went to the office of an independent financial adviser to buy insurance denominated in foreign currency.

After perusing several options, he picked a policy from AIA Group into which he will deposit the equivalent of 30,000 yuan ($4,311) a year. Though the buyer cited the product's high yield, the purchase had another motivation: moving assets out of China. Insurance policies are not subject to China's annual currency conversion limit of $50,000. The convenience of paying with a Chinese UnionPay card was also appealing.

The yuan has softened more than 6% against the dollar this year -- a sharper drop than in 2015, when China's government effectively devalued the currency. Periodic efforts by currency regulators to restrict overseas transfers have instead heightened fears of a further fall. Trying to convert several thousand dollars' worth of yuan into U.S. currency, only to be told that the bank lacks enough dollars to complete the transaction, would unsettle anyone.

Such factors are driving those with assets in China to funnel them out of the country through various methods. In addition to insurance, bitcoin outflows are picking up steam. Bitcoin trading volumes surged to record highs as the dollar rallied against the yuan after Donald Trump's victory in the U.S. presidential election last month, with China accounting for 90% of the turnover.

"Our daily transfer limit is 200 bitcoin," an official at a major bitcoin exchange in Beijing said nonchalantly. With the price of bitcoin now around $790, individuals in China can easily move more than $150,000 a day. Articles have cropped up online recommending other workarounds, such as physically carrying currency or going through the apparently still-thriving underground banking system.

A pipeline linking the Shenzhen and Hong Kong stock markets, launched amid much fanfare this month, has not fared well. Daily turnover of Shenzhen stocks via the program totals around 2 billion yuan -- disappointing given the presence of names such as Midea Group, which acquired Toshiba's white goods business this year, and top air conditioner maker Gree Electric Appliances.

"With concerns smoldering about the weaker yuan and capital flight, it's tough to jump in," a Hong Kong fund manager said.

Distrust of Beijing's haphazard approach to financial policy still runs deep. After the stock market bubble burst last year, authorities scrambled to prop up the market, mobilizing a "national team" of government-affiliated funds to buy shares. Once the Shanghai Composite Index stabilized above 3,000, the government started working to head off the next bubble. The concern now is that restrictions on real estate investment could push money back into stocks.

Beijing is taking aim at insurers, accusing some of pumping up prices of certain stocks via heavy buying. The government's preoccupation with ensuring stability is overwhelming any sense of the market's function as a place to raise money and allocate capital via a free price discovery process.

Chinese government bond futures went limit-down for the first time Friday. It is about time for the country to accept that Beijing no longer can curb capital flight effectively.

Toshiba Corp.

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