IN an underground mall just a stone's throw from the Chinese mainland's border with Macau, a row of 30 small shops with identical gold plaques do a brisk, though shadowy trade with mainland visitors, many of them bound for the gambling hub.
"Good rates. Better than the banks," shout salespeople jostling to usher clients into shops where thick wads of notes change hands. Licensed as liquor and dry goods stores with stacked shelves of rice wine and cigarettes, many conduct their real business in back rooms - as underground bankers and remittance agents.
"It's very simple," said one agent surnamed Choi. "You give me renminbi here. Then we deliver Hong Kong dollars to you in Macau. We can move tens of millions each day," he said.
As China's economy and financial markets mature and gain in sophistication, so too does a vast underground banking industry offering swift, cheap and low risk cross-border fund transfers. Much of that activity is conducted openly on the streets of south China's Guangdong Province, where businesses and individuals depend on underground networks to get around strict currency controls - both for legitimate commercial purposes and to safeguard assets beyond the reach of authorities.
Money laundering
Beijing is finding it increasingly difficult to stem the tide of speculative and illegal cash. In the decade since China began cracking down on money laundering, the government has amended criminal laws and strengthened commercial banking rules, but loosening restrictions on capital transfers has made it easier for hot money to be channeled across the border.
"China's financial markets are not that mature," said Yu Yongding, an economist at the Chinese Academy of Social Sciences and former adviser to the central bank. "There are lots of capital controls that have certainly contributed to these kind of activities, while corruption and money laundering also play an important role."
In affluent Guangdong in the Pearl River Delta region, cities like Zhuhai, Shenzhen, Guangzhou and Dongguan are major underground conduits for Chinese hot money. The province, where imports and exports amounted to US$984 billion last year - a quarter of China's foreign trade - has served as a portal for capital flows since China's economic opening over 30 years ago.
Collectively, the cities form part of a giant, unregulated underground banking triangle between the Chinese mainland, Macau, the world's gambling capital, and the global financial hub of Hong Kong.
In Zhuhai alone, more than a billion yuan (US$163 million) is transferred daily through underground networks, according to a straw poll of six agents from a tight-knit group of 100 in the border area.
Another deep-rooted echelon of shadow bankers exists across Guangdong out of public view, often working from secret offices, with deals conducted between trusted, well connected parties, often with just a phone call.
The Washington-based Global Financial Integrity group estimated about US$2.83 trillion flowed illicitly out of the Chinese mainland from 2005 to 2011, with Hong Kong the largest recipient.
"The enormity of money laundering right now is a problem," said a senior law enforcement official in Hong Kong. "Chinese banks in Hong Kong are basically a black hole, even now."
Yan Lixin, secretary-general of Fudan University's China Center for Anti-Money Laundering Studies, reckons more than a third of the capital moving through underground banking channels is dirty money being laundered. "According to the statistics within my scope and my own experience, it's approximately 30-40 percent at least," he said. "The situation is going from bad to worse."
Much of the unofficial flows of capital into and out of the triangle of Guangdong, Hong Kong and Macau, facilitate trade and investment, say businessmen.
Illegal cross border bank remittances can be used to wire extra capital into the mainland to buy raw materials or cover wages during peak periods. "It just takes 15 minutes, but official approval can take two weeks," said an electronics factory boss in Dongguan who often uses underground banks.
Unlike other shadow banking systems in east coast places such as Zhejiang, Jiangsu and Wenzhou that tend to collect deposits and extend high interest loans to small businesses starved of credit, Guangdong's underground banks tend to play the greatest role in black money transfers abroad, the central bank says.
A People's Bank of China anti-money laundering report from 2007 said nearly a third of China's illegal private banks originated in Guangdong.
In 2009, police shut down more than 40 underground banks in Fujian, Jiangxi and Guangdong provinces, according to a report in the People's Daily, involving 100 billion yuan. In the most recent public statistics available, 970 money laundering cases were investigated in China in 2009, involving 301 billion yuan. Guangdong was cited as a major blackspot.
Chinese President Xi Jinping has pledged to crack down harder on corruption and financial crimes like money laundering. The central bank issued new anti-money laundering rules to financial institutions in December, requiring them to rate clients' risks based on where they are and the kind of business they do.
Leaked internal report
In a leaked internal 2008 People's Bank anti-money laundering report, it said that since the mid-1990s, up to 18,000 Party officials, businessmen, CEOs and other individuals had "disappeared, carrying about 800 billion yuan."
The government controls capital inflows, bars underground banking and unauthorized remittances, and limits individuals' capital outflows to 20,000 yuan (US$3,300) a day. Under Macau banking and gaming laws, alternative remittance systems are illegal and suspicious transactions must be reported to the Macau Financial Intelligence Office.
Yet such capital flows flourish largely unchecked.
Part of the difficulty for China has been figuring out how to control an industry that provides a pressure valve for capital seepage as Beijing mulls further capital account opening and full yuan convertibility.
Authorities also don't want to quash an industry that's funneling credit to smaller firms, said Yan.
Punishing underground banks may be at odds with local governments wanting development and stability.
"Crackdowns will impact the local economy," said Yan.
"There's always a gap in China between policy and practice," said one businessman in Zhuhai who deals regularly with Chinese officials. "If they shut down the money changers, others will just crop up elsewhere. They're too smart."
Writing a six-digit VIP account number on a piece of paper, a remittance agent in Zhuhai said clients could use this to withdraw funds in chips or cash from most casinos in Macau, which raked in US$38 billion in annual gaming revenues last year, fuelled by cash-rich Chinese gamblers.
In a high-roller VIP suite at a major casino in Macau where baccarat tables are placed between two giant aquariums filled with bright reef fish, people queued at six counters, some holding slips of paper with an account number and a monetary amount written on them.
One man holding such a slip handed over his passport and was given a stack of eight, oblong HK$500,000 gambling chips.
"In peak periods you can always see some mainland Chinese bringing maybe 1 or 2 million yuan in cash ... taking the lift to the 20th floor and then taking Hong Kong dollars back down," said a Macau-based academic who asked not to be named. "This only happens when they feel comfortable with the environment. That's something that is quite common."
Typical VIP rooms in Macau maintain cash reserves or working capital of at least 100 million yuan, the academic said, with cash transfers tending to take place in hotel rooms or outside, away from surveillance cameras.
Choi said he and other Zhuhai agents regularly transfer millions of yuan directly into VIP room gambling accounts in Macau casinos.
"There must be a lot of money laundering," said Choi. "But we're not criminals ... We're just making life more convenient for people. We just move the cash."