Money on the Move

The tea was excellent.

Yellow colored, slightly sweet but a little thick in the mouth, with a smell not unlike dry hay on a ranch in the American Southwest somewhere. A very expensive variety, she assured me, coming from some backwater village in the mountains terrain spanning the Guangdong and Fujian borders.

I glanced around the room, there were plaques and etched crystal trophies on shelves everywhere. Most had accolades on them praising their ‘most valued customer’ or other similar phrases. A domestically produced flat-screen TV blazed in offset colors next to a massive hardwood desk, papers crammed on papers jammed between stacks of more papers.

The trumpets blared, an unmistakable tune as the CCTV evening news loudly made itself welcome in the room. ‘Stand Up! Those who are unwilling to become slaves!’

The tune beat on, and I sipped my tea, staring at the little tea tray deities as she launched into her pitch. I always liked the little frog with a coin in its mouth.

‘Do you know anyone who has access to the Milk Powder business in the US? I have already made a deal with Chinese friends in New Zealand, we’ll start sending our first containers next week. Your friend here Mr. Mu will vouch for them, he is helping make arrangements at the loca customs bureau this week. We have buyers in the north [Shanghai] who can handle large volumes. There’s a lot of money to be made.’

I waited until she finished, my elderly friend Mr. Mu started explaining to me why American Milk Powder will be a sure win in the coming years. I half listened, I understood the real reason why we were here, the rest was all just talk. To pass the time I pulled out a cigarette, an outstretched hand connected to a smiling face with one large gold plated tooth offered me a light.

After a few lazy puffs, I never have gotten in the habit of inhaling even after so many years living in Asia, I answered.

‘I’m not sure about that business. I can ask my brother-in-law in California, his family owns a cattle ranch somewhere upstate, they might know the dairy industry better than me. The reason Mr. Mu brought me today is that I might need some help from a friend, he’s returning the US and needs to transfer his money back from his company, they’re a cabinetry factory based in Hubei. Can you help?’

Mr. Mu looked at me from the opposite bench, and waited for this lady to reply. Obviously I’d been too direct, but that’s ok, with Mr. Mu vouching for me, I was already a part of the family. She would write off any unintended abruptness, after all this was business.

She smiled, and replied: ‘Ah yes…’ and took a long drag on her cigarette. This was a thin cigarette, tipped with gold foil, a little bit of sandal wood mixed in the tobacco for fragrance. Obviously something for someone of class, very ‘tu hao’, a phrase which has the rough meaning of someone with low class proving their wealth through flashy extravagance. I had to remind myself that no matter how unsophisticated this lady may seem, she is anything but a country bumpkin flaunting some new found wealth.

‘Mr. Mu mentioned that to me. A million dollars every…..3 months was it?’

I nodded, what else could I say?

‘We can handle that volume, but it there will be a cost. I’ll need to check with my friends, but I think it will be around 2.5% per transaction.’

Ugh...I sighed. Now it begins….

‘That’s a little bit more than we were expecting, you know that they have already been shipping custom cabinets to LA for a few years now, they have regular business in place. Maybe there is a way we could work together longer term, if you could help on the price?’

She smiled, and her eyes sparkled a bit, a quiet look but full of intensity, the way a famished wolf might eye their first bite of food in months from across the room just before they were ready to pounce.

Out came her cigarette holder, leather inlaid with mother of pearl. She pulled out another stick, and offered it to me.

‘You really should try these, the fragrance will grow on you…’

That was it, I knew something would work out from here. We spoke for a little while longer, and then it was time for dinner. She was meeting with her friends for a hotpot that night, a very local variety of hotpot to the south of China where you steam seafood above a pot of boiling rice porridge. The flavors of the sea food drip into the underlying porridge as it cooks, you then mix in other meats and veggies of your choice and polish off the meal with the most complex and delicious bowl of porridge ever conceived.

That night began a relationship of many years where I was fortunate enough to learn first hand how money moved between people and countries in the Chinese world. I would learn later that evening that her dinner ‘friends’ were the local chief of police and communist party attaché to the municipality, and she helped send their kids to school in the US back east somewhere. Good friends to have in South China’s complicated and endless web of regional cities, townships and villages.

This particular region of China, the historical towns that dotted the Pearl River Delta, have had wealth for centuries. They always have understood how to keep it hidden, and also how to connect with pools of Chinese wealth from overseas. Centuries ago, these towns launched the diaspora populations of overseas Chinese. First to Manila, home of the world’s oldest Chinatown, and then throughout the countries of Southeast Asia. Eventually these overseas territories grew to include Chinatowns in places like Sydney, San Francisco, New York and Honolulu. Wherever a westerner visited Chinatown in their hometown, you can be sure that somewhere in their family line, there was a connection to this region of China.

Most overseas Chinatowns organized around kinship, if not connected by immediate family than by the same town or village. Fraternal associations, business associations, and other support groups grew based on similar language dialects, and served the purpose of connecting these groups of people to their homelands. One county in particular is uniquely important in the history of China, the ‘fragrant hills’ county, or ‘Xiang Shan’. Now the city of Zhongshan and surrounding municipalities like Jiangmen, Kaiping and Zhuhai bordering Macau, this historical epicenter of the region was a central meeting point where the broad dialect groups of the PRD all came together. Whether you spoke more standardised dialects of Cantonese, Teochew dialects, or even Hakka dialects, you could find your kinship in Xiangshan county.

The saying goes in this region of China, ‘The mountains are high, and the emperor is far away’ still rings true today, and never more so than in the world of finance. Historically the area was a haven for pirates, and had swung in and out of political control from Northern China in different centuries. The coastal people always understood how to protect their money, and as their family diasporas grew, so did their capabilities of trading and settling payments throughout the world.

In the 1980s as China opened up for modern reforms after the death of Mao and the fall of the Gang of Four, there was a capital account problem for the country. Hong Kong and Macau families had just begun to invest alongside their estranged relatives who had been trapped until recently behind the communist bamboo curtain. Payments from around the world were flooding into the region in hundreds of different currencies and being banked in Hong Kong. Across the border however, official foreign exchange reserves were still tightly controlled, and a large portion of the countryside still barely used any form of money. Instead, most families would trade in official vouchers allowing them to shop at government stores, with cash trades slowly growing in influence but still only a part of the economy.

The first to take advantage of the disparity growing between cash rich Hong Kong and Macau compared to the pearl river delta were the coastal fisher families. Many Haka and Hoklo families had lived on islands in the delta for centuries, and had always maintained under the table trading markets with their cousins on neighboring islands which fell under the jurisdictions of Hong Kong and Macau. Local party officials in China usually were in on these markets, accepting bribes from these trading families and looking the other way as they quietly maintained business accounts on both sides of the border.

When investments really started to flow into the province, a lot of these families found themselves in a unique position, owning foreign currency in places like Hong Kong where they could sell fish and other seafood they caught in lucrative markets, then using the money to import hard to acquire foreign goods. They would collect vouchers domestically in China in exchange for smuggled goods, then buy the legally imported items themselves. These first families quickly gained money and influence, and throughout the 1990s used these networks to buy influence in local party committees across the region. They benefited tremendously from the backhanded efforts of local governments to sell land to notoriously greedy developers, as many of them were able to leverage their overseas family and connections to become importers of foreign materials.

This is how my friend Mr. Mu had made his money, and how he built his reputation as a respected shadow banker on top of his other business interests. Mr. Mu had started working as a delivery boy for a Hong Kong invested factory in the early 1980s, but through family in Hong Kong learned about the trade in certain auto part accessories. He went into business with his boss because of his overseas connections, and as the first Chinese auto markets began to develop he quickly made money. He worked with friends based on California to find more products to import, and slowly built an account of US dollars in addition to what he earned in China. When he was able he bought a house in San Diego and emigrated, having his children in the states instead of China. There are many stories like this, and it is the foundation of the international shadow banking sector which drove China’s growth in the south when the Chinese government was only playing catch up.

Mr. Mu and I had met in Zhongshan when I first visited the city. He was introduced by my first boss, a local property developer who had gained some notoriety building one of the first clothing wholesale markets in the city’s western district in the early 1990s. I had been sent from Hawai’i to work in the city in support of property development projects our company was building, and my boss was a long time partner of the business supplying all types of manufactured materials to the projects from bespoke manufacturers across the southern edge of the Pearl River Delta. He and Mr. Mu were old friends, and through Mr. Mu’s assistance he had been able to move a good portion of his money to Honolulu over the years, buying a house for his family and getting his child to college in the state. As the relationship I had with my boss grew stronger, he vouched for my reliability with Mr. Mu, and we began to spend more time together as well. After years of Dim Sum weekends and endless talks discussing new business ideas between California and South China, Mr. Mu trusted me.

My boss always supported my decision to move to Hong Kong and attend law school, and I even earned some extra income doing contract work with him from Hong Kong while I attended school. The trip to Zhongshan from Hong Kong has always been a relatively painless one, a short one and a half hour ferry ride up the Pearl River and then a drive through local city roads to the heart of the town. Quite a few of my weekends off of law school were spent traveling back up the Pearl River to meet with my old boss and Mr. Mu, discuss business and meet with other local developers in town. I became well known in certain circles in the city as the young foreigner who can speak Chinese working with my boss, and this all helped develop a level of trust that would likely have been impossible to cultivate if I had been living in a larger city.

My Hawai’i upbringing helped again in this circumstance. My boss was not the first person from this town to make a home for himself on the islands. Sun Yat Sen, the father of China, or ‘国父’, came from Choi Heng village on the outskirts of Zhongshan. He had emigrated to the Kingdom of Hawai’i where his older brother owned a rice plantation in Maui when he was a young boy, and attended school at the missionary schools of Iolani and Punahou before being sent back to China when he asked his brother’s permission to convert to the baptist faith. Hawaiian-Zhongshan fraternal associations were the first fundraisers to support Dr. Sun’s vision of a republican China to replace the failing Qing dynasty, and local Hawaiian friends protected him from Qing-dynasty undercover agents during these earliest, most vulnerable stages, of his Revive China Society, the Xing Zhong Hui 兴中会.

Many families in Zhongshan and the surrounding regions still had distant relatives in Hawai’i, and by introducing myself from there and being involved in recognized business between the two places, I was accepted with a higher level of trust than I would have been as a typical foreign business person coming to the city to invest or trade.

Now that you understand the background why I was trusted in the way that I was, you’re probably wondering exactly what it is these groups do?

Let’s take a simple scenario:

You own a company in China making little tea cups. You export these teacups to Chinatown restaurants all over the world. They pay you in US dollars, Euros, Australian Dollars, and Japanese Yen. You can accept all of these currencies as payment, but in order for you to pay your workers, maintain your machines, and make rent each month, you need Chinese RMB.

In many places around the world, you would simply sell your foreign currency to your local bank, and they would pay you the market rate in Chinese RMB less any fees or expenses. In China in the past however, the process was not so direct. First, if you went to the bank you would need to pay the mandated exchange rate, which sometimes was reflective of market prices, but sometimes was much more expensive. Then, at this time when Chinese banks were not nearly as sophisticated as they are today, by working with your bank you would also need to pay a host of fees and expenses for this type of service. You were completely at the whim of your local bank, and if they did not have enough currency reserves in place at any given time, you might not be able to acquire as much currency as you need. Being an upstanding international exporter, you were probably receiving regular payments from long standing clients, and like any business you wanted to make sure you kept your currency in the denomination that was most valuable. US dollar values fluctuate around the world, and you would be mindful to watch what your total account value was based against the changes in values between US dollars and the other currencies you were receiving. If your local bank couldn’t help you do that through their official accounts, you could and sometimes were on the losing end of a bad currency value fluctuation.

Syndicates like the one my friend Mr. Mu brokered for were an unofficial response to the lack of sophistication Chinese banks had at the time. Bear in mind that lack of sophistication was there in part because of outdated technology and banking standards being retained at the local village and city level branches, but also in part because of prohibitive regulations set in Beijing designed to keep the Chinese official exchange rate under control and avoid any mass currency flight out of the country like everyone witnessed during Asia Financial Crisis in the 1990s.

These syndicates were affiliated networks of import-export businesses throughout the south of China, originally tied together by traditional kinship networks but gradually expanded through business ties to other parts of the country as well. A syndicate would always have a few different ‘shadow bankers’, or people who spent their days owning pools of foreign exchange currency in different accounts. As members of the syndicate needed to remit or transfer payments across the border, they would instead coordinate with their other syndicate members to settle debts mutually on either side. So, in our scenario, you might have received your US dollars in your friend’s restaurant bank account in Los Angeles, so by coordinating with the syndicate manager in China, you would agree to pay off another syndicate member’s equivalent US dollar debt from your friend’s bank account in LA, and in return some member of the syndicate in China would transfer RMB to you to cover a debt from their side. The money hadn’t transferred across the border, but your money ‘left’ the LA account where it was held, and an equivalent value ‘entered’ your account in China. Most importantly, the ‘transfers’ could be practically instantaneous in banking terms, needing as little as a few minutes for the syndicate manager to arrange mutual transfers of cash, depending on circumstances. That syndicate manager fixed exchange rates based on the market, and collected fees as a percentage of the transaction.

This system was absolutely necessary in the opening up of China, and could only flourish in the south of the country where connections to open markets like Hong Kong, Taiwan and Singapore allowed the growth of these syndicate like arrangements. As the country continued to open and banks became more sophisticated, in part because the government wanted to ensure more control, these syndicate networks competed more and more on price. By the late 2000s, this was an incredibly competitive market, and any smart businessman in China would always maintain relations with a few different syndicate representatives in order to hedge their risk of laws or regulations changing suddenly in the country locally or nationally, cutting off access to international markets.

These types of monetary systems of transfer are nothing new, and can be found throughout history. The knights Templar were famous for creating this type of a system between their temple fortresses on the pilgrimage road from Europe to Jersulum. In South Asia and many Islamic states, the traditional system of Halawa operated nearly identically among kinship networks, and were a major challenge to overcome for the US lead coalition seeking to fight terrorism financing in this century. Traditional Chinese records have called the system ‘飞钱 Fei Qian’ or ‘flying money’, but in the modern day no one really uses that terminology.

The challenge these systems presents, as alluded to above, is that because they are unregulated, it becomes easily corruptible with illicit funds. Terrorism financing was not as much an issue in the China context as it was in places like the Middle East, South Asia or even Latin America, but tax evasion and criminal activity were a major concern for the government.

For example, if your teacup factory lost money, and was really a front for a chain of Karaoke establishments earning unreported cash, then it is easy to understand how this system can be taken advantage of by savy criminal organizations. When you also consider that most trading companies by the 1990s were trading with letters of credit and other credit based trade products in addition to cash payments, it is easy to begin to understand how the whole system could dramatically leverage relatively small-scale concerns into much, much larger issues.

These days the government has increased enforcement against these systems of payments, and in line with a global push for transparency in tax reporting and increased regulation of international financial activities, many of the syndicates which focused on the legitimate side of the trading world have died away. At the time however, if your company needed to guarantee that it could make and receive payments with counter-parties outside of China, participation in these syndicate groups was the only way to ensure that you would have options.

Trust was important in this world, especially where legitimate business was concerned. The syndicate needed to trust that the funds they were inviting into their network were not tainted by illegal activities. No upstanding factory owner wanted to have their company and livelihood destroyed because they accepted drug money for example. The newcomer to the group also had to have a lot of trust in the syndicate, because they were essentially handing over their money to complete strangers and expecting a return.

It was against this backdrop of money exchange and transfer that some of my more interesting business stories took place.