China employs strict capital controls to keep assets in the country. These measures however are porous – which is playing into the hands of Hong Kong-based banks. This could however pose risks.
UBS is the market leader in private banking for wealthy Asian clients, with Credit Suisse in third place and Julius Baer in fifth spot. This shows that the lucrative market is well and truly in Swiss hands.
This is particularly true for Hong Kong, where Swiss institutes are well represented: Credit Suisse alone employs 590 members of staff in the former crown colony, and for good reasons. The Hong Kong hub serves as a springboard to mainland China, the Asian market with the biggest growth potential by far. China boasts around 300 billionaires, and every week a new one is added to the list.
There is however a snag tied to the blossoming market potential. The Chinese government maintains strict capital controls to prevent these assets from moving out of the country, with Chinese residents only allowed to invest abound $50,000 per year outside the country.
Illegal Foreign Exchange Bureaus
However, the Chinese government’s controls are porous, and Swiss bankers in Hong Kong apparently know this only too well, as French-language Swiss newspaper «Le Temps» reports. Ultra-wealthy Chinese often use export firms who generate profit abroad, which are then invested outside China. A lot of mainland Chinese assets are invested in Hong Kong company shares, which in turn are booked with Swiss financial institutions, as one banker told the paper.
This is still legal, but there are apparently other, more risky, loopholes waiting to be exploited. Some assets for instance are moved from China to Hong Kong using illegal currency exchange bureaus. Another favored route is that via the tax havens in the Caribbean, with Hong Kong – and Swiss banks – as the final destination.
Better Climate for Joint Ventures
The Chinese authorities are probably aware of the detours and shortcuts, and one has to ask for how much longer they will be tolerated. There is a lot at stake for the Swiss private banks. Switzerland’s financial center has developed close ties to China, which in turn has helped it establish itself as a hub for trading the Chinese renminbi.
Furthermore China has bowed to pressure from the financial sector for greater foreign participation in the country. This has allowed foreigners to hold 51 percent in a financial-sector joint venture, as finews.asia has reported.
Keen to Expand
Both UBS and CS maintain such holdings in China, and are keen to expand them. This means they are reliant on the goodwill of the Chinese authorities. It wouldn’t be the first time that Swiss banks threaten smoothly functioning businesses by exploiting such loopholes.
