China targets currency smugglers

Stock market speculators are behind an increase in currency smuggling

Chinese authorities have launched a crackdown on currency smugglers, to stem a tide of cash leaving the country for investment in Hong Kong stocks.

Chinese customs authorities are blaming a near doubling in currency smuggling out of the country on speculators attempting to exploit reforms to Hong Kong stock market regulations.

The stock market is rumoured to be about to open up investment rules governing certain closed shares, or 'H-shares' which charts price movements of mainland Chinese companies listed in the territory.

H-shares have risen on rumours of deregulation

At the moment, the people of mainland China are not allowed to invest in H-shares.

But many do so anyway because they expect the value of these shares to rise sharply if H-share trading is liberalised.

Some even borrow money in Hong Kong, offering property and other assets in mainland China as collateral.

Raids

In February, a similar move in Shanghai, allowed domestic investors to buy so-called 'B-shares' which had previously been reserved exclusively for foreign investors.

The move prompted a more than doubling of the value of these stocks.

With speculators hoping that H-share reforms would prompt similar gains, Chinese investors have poured up to 20bn Hong Kong dollars (£1.8bn, $2.5bn) in illegal cash into the territory, according to Chinese state media.

Chinese authorities have raided several brokerages in southern Shenzhen to ascertain whether they have helped local Chinese investors trade illegally in H-shares.

Hidden cash

In addition to the flow of hard cash out of mainland China into Hong Kong, there is a flow of dollars and other hard currencies out of China altogether, as dividends and profits from the sale of shares are hidden in foreign bank accounts.

Up to 20bn HK dollars have entered the territory

One post parcel destined for Switzerland but intercepted by customs authorities in Guangdong contained 50,000 HK dollars in cash - and that was just one of more than 140 cash shipments discovered during a four month period.

Every means of smuggling has been used, from container trucks to express mail, making it extremely difficult to catch the smugglers.

Stock prices

The markets clearly anticipate that the crackdown will rein in demand, and as a consequence there was a sharp sell-off of H-shares late last week.

But Hong Kong's H-share index is still up 40% on the year.

China's B-shares, which are denominated in US dollars in Shanghai and Hong Kong dollars in Shenzhen, have risen even further.

Shanghai B-shares have risen 128% and Shenzhen B-shares have risen 166% this year.