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China Cracks Down On Underground Banking, But “Fake” Goldman Sachs Still Operating

China launched a three-month campaign to crack down underground banking across the country to prevent money laundering and illegal capital outflows.

The Chinese government made the decision following a stock market rout, which was primarily caused by investors’ concern regarding its deepening economic slowdown. The concerns were ignited by China’s currency devaluation and weak manufacturing data.

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Market strategists at JP Morgan Chase & Co estimated that China suffered remarkable capital outflows of around $340 billion as of the end of June. In the second quarter alone, China recorded $140 billion in capital outflows.

In a report released in late July, JP Morgan strategists said, “The magnitude and duration of capital outflows are unseen in China.”

[drizzle]On Monday, the Shanghai Composite Index fell 8.5%, the biggest one-day decline in eight years. China’s state media even described the situation as “Black Monday” other market observers described it as "Manic Monday."

China will focus on illegal fund transfers connected to corrupt officials/terrorists

According to China’s Ministry of Public Safety, the crackdown will focus on illegal fund transfers and money laundering activities connected to corrupt officials and terrorists. The Chinese government will carry out its campaign until the end of November.

Public Safety Vice-Minister Meng Qingfeng emphasized that underground banking activities contributed to the volatility of the country’s financial markets. According to him, “Some grey capital has been transferred through underground banks across [China’s] border,” which poses a serious risk to the country’s foreign exchange management, disrupts the capital markets, and threatens the financial security.”

Mr. Meng said the government will deploy special action groups in regions where underground banks are widespread to compel market participants to conduct their financial transactions through legal channels.

China intensifies effort to maintain control of economy

Keith Pogson, a senior partner of banking and capital markets, Asia Pacific at Ernst & Young commented that the Chinese government’s campaign against underground banking shows that it is intensifying its effort to maintain control of its economy and financial markets, and to reassure domestic and foreign investors.

Pogson emphasized that it was critical for China to show control. He also noted that shadow banking activities weakened the Chinese leaders’ control of the economy. He said the campaign is “an important message to send—we’re going to clamp down [underground banking] market. We want to take control.”

In April, the Ministry of Public Safety, the People’s Bank of China, and the State Administration of Foreign Exchange implemented a similar campaign. The agencies crack down illegal fund transfers through underground banks and offshore companies. The campaign eliminated 66 underground banks and arrested 160 suspects responsible for illegally transferring approximately $67 billion out of China.


China Cracks Down On Underground Banking, But "Fake" Goldman Sachs Still OperatingFake Goldman Sachs operating in China

Separately, Bloomberg reported that Goldman Sachs is now included in the list of pirated brands in China. A Chinese firm named Goldman Sachs (Shenzhen) Financial Leasing Co is operating in the city across the border from Hong Kong.

The Shenzhen firm has been operating since 2013, and it is using the Chinese characters “gao sheng,” which is similar to the real Goldman Sachs. The receptionist at the Shenzen firm admitted that it is not affiliated with real Goldman Sachs.

Goldman Sach’s spokesperson in Hong Kong, Connie Ling confirmed that U.S. bank has no connection with the Shenzhen firm. She added that Goldman Sachs is investigating the issue.

The existence of the fake Goldman Sachs in Shenzhen was discovered after a U.S. casino workers union sent to the China’s Central Commission for Discipline Inspection, which is leading the biggest anti-corruption campaign in the country.

The union asked the Chinese government to investigate Goldman Sachs (Shenzhen) Financial Leasing, which is allegedly connected to a group of gambling companies controlled by the family of Cheung Chi-tai. Prosecutors accused Mr. Cheung of having ties to organized crimes or triads in the country.

According to the union, Goldman Sachs Shenzhen is controlled by a gold trader based in Hong Kong and is not affiliated with the real Goldman Sachs. The gold trader is connected to Mr. Cheung through relatives.

Paul Haswell, a partner at Pinsent Masons, law firm based in Hong Kong commented, “There have been quite a few cases where Chines individuals or organizations have registered in China the trademark of an existing and established brands.”

“It’s notoriously difficult for an overseas claimant to persuade the Chinese courts that there has been trademark infringement. There’s still a practice of whoever registers first wins,” added Haswell in an e-mail to Bloomberg.