Sunday, 18 October 2009
Vigilance the key as hot money flows into Hong Kong
The mainland authorities maintain strict controls on individuals converting yuan into other currencies, to prevent money flooding out of the country in search of investment opportunities. But you would not think so to look at mainland buyers flush with Hong Kong dollars who are driving the prices of luxury residential properties in the city to record levels. They now account for one in 10 transactions, according to one estimate. It is fuelled by a flow of funds across the border under various complex arrangements. As we report today, it is far from clear whether some are legal.
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Vigilance the key as hot money flows into Hong Kong
11 October 2009
The mainland authorities maintain strict controls on individuals converting yuan into other currencies, to prevent money flooding out of the country in search of investment opportunities. But you would not think so to look at mainland buyers flush with Hong Kong dollars who are driving the prices of luxury residential properties in the city to record levels. They now account for one in 10 transactions, according to one estimate. It is fuelled by a flow of funds across the border under various complex arrangements. As we report today, it is far from clear whether some are legal.
That, some in Hong Kong might argue, is the mainland’s problem. On the face of it, the trend is good for our city, because property investment is a mainstay of our economy. But such a cross-border flow of “hot money” warrants close scrutiny by both sides, as these cash trails provide opportunities for money-laundering.
The amounts involved are significant. It is common for individuals to pay HK$20 million for a new flat in a prestige development. Ways of moving capital from the mainland range from the perfectly legal to the quasi-legal to the unlawful. But the legal avenues for individuals, such as travel allowances and ATM card withdrawals, subject to an annual limit of US$50,000 or equivalent, would barely cover a down payment on a property in Hong Kong.
To get over that obstacle, arrivals under the Individual Visitor Scheme can open bank accounts and swap yuan for Hong Kong dollars with a local partner, without shifting money across the border. Mainlanders can mobilise a number of friends to contribute their annual foreign currency limit of US$50,000. Or cash is simply smuggled in. And there is always the underground banking system - at the price of hefty commissions. It is not always clear whether such methods breach currency controls.
Some property buyers from the mainland may also qualify for residency in Hong Kong. The government welcomes property investment through its capital investment entrant scheme, which offers residence to people with HK$6.5 million to invest in securities or property. True, mainlanders are excluded unless they have the right of residence in a foreign country, but that is not hard to come by if they want it badly enough.
The biggest worry with the money flowing across the border is that some of it is likely to be the proceeds of crime. Money-laundering is of serious concern to Hong Kong, which has a reputation to defend as an international financial centre that upholds the rule of law. Corruption, rampant on the mainland, opens the door to organised crime, as shown by a recent crackdown in Chongqing that netted top city officials and hundreds of police as well as gang members among more than 1,500 arrests.
With its free markets, low tax and tax-free investment gains, our city is a potential magnet to money launderers and tax evaders. Financial centres such as Hong Kong have a vital role to play in the fight against money-laundering. That is why our city is a member of the Financial Action Task Force, an international effort to combat it. The government has acted to defend the city’s reputation, for example by tightening rules for money transfers to try to curb underground banking, and relaxing the confidentiality of tax-file data to meet concerns about the city being used as a tax haven. The flood of money into the property market shows Hong Kong cannot afford to relax its vigilance.
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