China’s takedown last weekend of two underground banks caught funneling money to Macau is a good sign that the Chinese are successfully circumventing Beijing’s capital controls. The banks implicated were reportedly responsible for moving $3.1 billion worth of yuan to Macau for 10,000 clients. This is both bullish and bearish for Macau stocks because on the one hand, it shows that money is successfully slipping though the mainland. Macau needs this to maintain its recovery, and the more that gets through, the better for the industry. On the other hand, it’s bearish because it means that Macau is still pitted against the Chinese government, and at their mercy should their mood change.
The question is, can Beijing really stop the money flow, and do they even want to anymore anyway?
The end result of the bust was the freezing of only RMB30 million. That’s nothing. A tiny drop in the bucket that will have no effect on the industry. It signals that money smuggling is happening most likely everywhere, and two, that it doesn’t seem that Beijing is taking it all that seriously anymore. If they were, we would have seen headlines of huge busts in the billions of dollars, not just RMB 30M, a paltry $4.5M.
The act of busting an underground bank is like nabbing a dime-bagger on a street corner. Put one behind bars and the next one is just waiting in line right behind him. These banks are likely a dime a dozen, no pun intended. All that can happen is that the commission for taking the risk of moving money to Macau may tick up slightly, just like the prices for illegal drugs tick up after a drug bust, merely subsidizing the players that have not yet been caught. Capital controls are as futile as the drug war. They do not work.
In today’s world of digital currencies especially, it is extremely simple to funnel money anywhere in the world very cheaply. Consider, the recent forks in the Bitcoin chain happened because the average price per transaction reached a high of (!) $19 and miners got uneasy about it. For digital currency transfers, $19 is a lot, but it’s nothing compared to the three days’ wait and multi-tiered fees you’ll pay to wire fiat currency anywhere through the traditional banking system.
Buy cryptocurrency on mainland China, go over to Macau and sell it. Deposit the money on some kind of prepaid debit card or have an arrangement with an underground bank in Macau to hold the money there in someone else’s name for a fee. No longer is the average guy reduced to looking up “money laundering” in a dictionary, like the nerdy software engineer group did in the movie Office Space. All the tools are right there for anyone to use. Most of the money being funneled to Macau from the mainland is almost certainly being funneled through Segwit and Bitcoin Cash (BCH), this as Segwit nears the $10,000 mark. And China is focused on $3.5M in a couple shadow banks?
Going after isolated shadow banks is like swatting a mosquito on the edge of a swampy breeding pool. The only way this can be stopped is by banning cryptocurrencies in China entirely. China will not do this on its own because it would cause a global financial riot, considering the fact that Segwit is the best performing asset in human history. Beijing could conceivably engage in a pinpoint operation to firewall all access to digital wallets on Macau itself, but I don’t see this happening, because China does not want to cause both a cryptocrash and a Macau crash simultaneously. The fight against cryptos will be a concerted global effort led by a consortium of powerful central banks, if and when it happens. It won’t be one country taking the lead to counter its own local money smuggling issues.
What this tiny little bust signals is that the Chinese government is simply trying to maintain the pretense that it is cracking down on money smugglers, when most likely what is really happening is that government officials high up are being paid to cover for larger operations, using smaller busts as cover that they are still serious. The government of course also has the option of simply foregoing capital controls entirely, but that would be too embarrassing. So the best solution in between would be to take down the smallest operations while keeping the biggest ones safe behind closed doors.
Keep in mind that this small bust of $4.5M began on a tip surrounding a long dormant account that suddenly came back to life. Meaning, the investigation was not even initiated by police. The $4.5M frozen was divided among 148 bank accounts, for an average of $30,405 per account. This is nothing but middle-class retail gambling money for someone looking for a fun vacation. Even if we take the bigger numbers of $3.1B for 10,000 clients, that averages out to $310,000 per client. That’s still barely noticeable or consequential. Most likely there were a handful of big accounts taken down together with a bunch of small retail accounts, thousands of average Chinese caught in the crossfires trying to transfer a few thousand dollars and have a decent time playing baccarat at the mass market tables.
Macau keeps clawing higher, now at highs not seen since October 2014. As long as China turns the other way minus a few face-saving retail sacrifices in the name of wise capital controls, the trend can theoretically continue higher. However, the trends for Macau stocks are not stable, depending mostly on government impetuosity. Much like the companies they represent, buying Macau shares at this point is a gamble.