In the latest crackdown in illicit Chinese capital outflows, China’s UnionPay banned on Saturday Chinese residents’ use of credit and debit cards supported by its payments network to purchase capital investment type insurance products in Hong Kong, as authorities move to further stem capital flight by narrowing a popular gateway for shifting money abroad and prompted the latest move higher in Bitcoin as a capital flow alternative to traditional channels.
Strict enforcement of the pre-exiting upper purchase limit of $5,000 on applicable products (e.g. travel-related accident and illness policies) was imposed, an amount imposed by China’s foreign-exchange regulator earlier this year. There is still no limit on how many times customers can swipe their cards to complete transactions..
Visitors from mainland China purchased a total of HK$30.1 billion ($3.85 billion) of “insurance products”, also known as Vancouver houses, during the first half of this year, already on par with the HK$31.6 billion total in 2015, according to data from the Hong Kong Office of the Commissioner of Insurance cited by the WSJ.
As the WSJ notes, mainland Chinese clients using debit and credits cards issued by UnionPay are only allowed to buy accident, illness, and tourism-related insurance policies, while other programs are “strictly banned,” according to a statement released Saturday by UnionPay International, a subsidiary of China’s largest bank-card provider UnionPay. The rules are part of a new guidance on payment for overseas insurance products, currently being tested in Hong Kong.
The move came as an increasing number of Chinese residents traveled to Hong Kong to buy insurance policies, particularly life insurance policies with investment functions to counter worries of sustained weakening of the yuan. The purchase of insurance policies is also used to bypass the $50,000 limit Chinese citizens are allowed to move overseas a year.
The company said they noticed “a surge in multiple transactions in individual cards with individual merchants over certain overseas insurance products.
”Jittered by two rounds of abrupt devaluation of yuan last year, Chinese residents are eager to park assets overseas to hedge a strengthening dollar. China’s onshore yuan has depreciated by 4.4% against the U.S. dollar this year, and many widely see further weakening in the yuan as China’s central bank repeatedly guided the currency to a six-year low via a midpoint reference system.
However, as Goldman says, although the purchase of insurance plans in HK has been a widely-publicized channel of capital outflow, the move is unlikely to reduce FX outflow by a significant amount. Whether/how the curb may impact the pace of outflows through other channels is unclear at this point.
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Here are the main points on this latest capital flow crackdown from Goldman’s MK Tang:
The curb comes about 9 months after a February announcement for the stronger enforcement of the long-standing upper limit (US$5,000 per transaction) to Chinese residents’ purchase of overseas insurance products using UnionPay cards. Such a purchase involves residents transforming their RMB assets (they pay their UnionPay bills with RMB onshore) to insurance claims that are denominated and settled in FX (per the terms of the overseas insurance plans that they purchase).
On that occasion, the authorities emphasized that they did not tighten the rules per se; rather they were simply reinforcing the implementation of the limits. The announcement was made following very sizable FX outflows in January (at over $120bn on our measure).
In the latest move, a specific emphasis is being placed on the use of UnionPay cards to purchase capital investment-type insurance products in HK (e.g., life insurance policies that entail savings/investment elements); that said, there is still uncertainty on what other products may fall into the banned categories (see our insurance research sector team’s comment here for more details) . Similar to the macro backdrop seen when the February announcement was made, outflow pressure has picked up notably in the last several weeks. FX outflow on our measure, accelerated to close to $80bn in September (although PBOC’s FX reserves fell by a much smaller amount; see our September flow comment here), and the run rate of outflow in October might have been similarly fast (if not faster), judging from the fairly rapid CNY depreciation against the USD during the month (over the past year, FX outflow has tended to be larger when the pace of depreciation is more rapid).
In our view, the rule tightening is likely partially due to concerns about outflow, and partially driven by the wide media coverage of surrounding stories of Chinese residents’ purchase of HK insurance products as a way to evade capital control. Nevertheless, the curb is unlikely to significantly reduce FX outflows, given the relatively modest amount of money involved (total premiums paid by mainland Chinese for HK insurance products including payment (excluding UnionPay cards), was only about US$12bn in 2016H1 vs. total FX outflow in China of $330bn during the same period).
As we have discussed previously (here), a much larger amount of stealth outflows in China is likely to have been facilitated by trading companies who maintain part of their net export proceeds offshore; possibly without the required reporting/documentation. Such a practice can be captured in the current account (trade transactions), but not fully in the capital account (net proceeds kept offshore with false reporting), hence resulting in a negative entry in China’s Balance of Payments line item “net errors and omissions” (NEO). While it has moderated somewhat amid authorities’ rounds of crackdowns on underground banking (e.g., see here), NEO has remained notable at -$50bn in Q2’16 and totaling about -$200bn since Q3’15.
But the insurance purchase ban is not related to these unregulated outflow channels (residents’ purchases of overseas insurance products are accounted for as a reduction in China’s current account surplus). And whether/how the insurance ban may affect the size of outflows through other channels due to for instance, sentiment impact, is also not clear at this point.
In general, significant tightening in the capital account especially in areas that may affect common households, could incur risk of public misinterpretation of policy intent and could potentially be counterproductive by prompting more outflows through unregulated channels where outflow may not be as effectively blocked. We note that authorities have typically been very careful in managing signals and expectations in this regard in the past year. Further administrative adjustment of capital control (e.g., recent crackdowns on underground banking) seems probable should outflow pressure remain, in our view.