Risk vs. Opportunity: China’s Probe of Non-resident Accounts With Over a Million in Deposits

China’s ongoing probe of non-resident financial accounts may be aimed at uncovering corrupt activity by Chinese nationals with foreign passports or residencies.

The backdrop: At the 2014 G20 Summit, China pledged to meet the Organization for Economic Co-operation and Development (OECD) standard for automatic exchange of financial account information for tax purposes.

The OECD initiative seeks to enhance tax transparency by strengthening global tax cooperation and combating the use of overseas accounts to evade taxation. All residents living in G20 countries can be subjected to cross-border tax source supervision.

This July, China’s financial institutions began investigating non-resident financial accounts with over $1 million in deposits. Six state financial departments—Ministry of Finance, State Administration of Taxation, China Banking Regulatory Commission, China Securities Regulatory Commission, China Insurance Regulatory Commission, People’s Bank of China—ordered the prove, which concludes on Dec. 31.

Why it matters: China isn’t an attractive place for foreigners to deposit their cash and assets, but the reverse is true for Chinese nationals who are permanent residents in G20 countries or naturalized overseas Chinese. So China’s financial accounts probe could prove to be very tricky for non-resident Chinese nationals or ex-nationals.

Our take:

1. Xi Jinping shifts anti-corruption focus to the financial sector

  • For many years, Chinese Communist Party princelings in both public and private sectors exploited their official connections to enrich themselves.
  • One example is Alvin Jiang and his private equity firm Boyu Capital profiting off Alibaba Group’s IPO in 2014. Alvin Jiang is the grandson of Jiang Zemin.  
  • Many Chinese officials and wealthy businessmen have foreign passports or are permanent residents of several countries. These people are known to launder their money overseas before transmitting the funds back to China for investing. Some of this capital fueled the short selling which led to the 2015 Chinese stock market crisis.

2. Hidden funds, capital flight

  • The financial probe will expose underground funds, or spark a fresh round of capital outflows from China.

3. Opportunities abound for the overseas asset management industry

  • Many Chinese officials and wealthy businessmen could be looking to park their capital and assets outside China.
  • Overseas asset management firms looking to capitalize on the situation will have to gain the trust of the personnel mentioned above.