Photographer: Xaume Olleros/Bloomberg

The Credit Card Loophole That Gets Around China's Capital Curbs

  • China broker offers clients 1st class to Hong Kong plus hotel
  • Multiple swipes popular amid limits placed on UnionPay cards

More than 800. That’s how many times Hong Kong insurance agent Raymond Ng swiped the credit cards of a mainland Chinese client buying HK$28 million ($3.6 million) worth of insurance policies in the city earlier this month.

Dozens, maybe more. That’s how many other agents are using similar tactics as a way around new restrictions on insurance policy purchases by mainlanders that are often used to evade capital controls and get their money out of China, according to interviews with five Hong Kong agents working for Prudential Plc, AIA Group Ltd. and two smaller insurance companies.

“There are always ways around new restrictions,” said Ng, 30, who started selling insurance and investment products to mainland Chinese four years ago, declining to allow his company’s name to be used. "Chinese customers are accelerating the pace of moving assets outside China, especially through insurance products."

Multiple credit-card swiping to buy insurance products, even hundreds of times, isn’t illegal in Hong Kong, but it allows individuals to exceed limits on insurance purchases by mainlanders meant to control capital outflows from China. The widespread practice shows just how eager Chinese remain to move money abroad amid a weakening economy and expectations of further declines in the yuan, potentially putting pressure on authorities to impose stricter curbs.

Clamping Down

Since February, Chinese regulators have moved to control the booming business of citizens buying insurance in Hong Kong, first by putting a $5,000 limit on each transaction and later by limiting electronic transfers for such purchases. Previously there had been no limit on the use of the country’s China UnionPay Co. credit and debit cards for buying the policies, giving individuals wanting to move money abroad a convenient way around the country’s foreign-exchange controls. Multiple card swipes mean the new curbs lose some of their effectiveness.

When it imposed the $5,000 limit, the State Administration of Foreign Exchange said it would "closely monitor" cardholders and insurers for cases where cards have been swiped multiple times, though the regulator stopped short of banning multiple card use to purchase individual policies.

Violating Controls

China’s foreign exchange regulator allows Chinese citizens traveling abroad to purchase health or travel insurance policies, but it views buying offshore life insurance and investment policies a violation of capital controls, Wang Yungui, a director of SAFE’s General Affairs Department said at a press conference in Beijing last week.

The most popular polices in Hong Kong, agents say, are those that combine a life insurance element and an investment component. These can be cashed out after a few years, at which point the money can be used for property investment or other purposes, raising fewer questions about how the money left the Chinese mainland. Hong Kong’s insurance regulator last year warned of growing money laundering risks through such policies.

Chinese citizens are allowed to convert up to $50,000 worth of yuan a year into other currencies, and they can move that money abroad for investing purposes regulated under the country’s capital account policies. China doesn’t impose any limit on citizens’ use of debit or credit cards overseas when they’re used for consumption purposes -- settling hotel bills or buying luxury goods, for example.

Difficult Distinction

But it’s next to impossible for regulators or credit card companies to distinguish between purchases of health and travel insurance policies by mainland visitors to Hong Kong and the more controversial life insurance and investment policies.

A spokesman for AIA said in an e-mail response that it complies with all guidelines in the processing of applications of life insurance by mainland visitors in Hong Kong. A UnionPay press officer said last week that the company complies with regulatory requirements on managing merchants through monitoring and analyzing data.

Spokesmen for Prudential and for Hong Kong’s Office of the Commissioner of Insurance declined to comment on the practice. The People’s Bank of China and SAFE didn’t respond to requests for comment.

Prudential, which had previously limited its Hong Kong agents to swiping credit cards no more than 10 times for each client, removed that ceiling as of last Monday, according to two agents briefed on the change. Prudential declined to comment on the move.

So far this year, share prices of Prudential in Hong Kong have fallen 20 percent and AIA is down 9 percent, compared with the 7 percent decline of the city’s benchmark Hang Seng Index during the same period.

Raised Stakes

The People’s Bank of China’s battle to shore up the yuan caused foreign exchange reserves to drop to a four-year low in February, raising the stakes in the effort to stem capital outflows, which reached $1 trillion last year according to Bloomberg Intelligence. Fears that money is leaking out via purchases of insurance in Hong Kong help explain the recent clampdown.

Hong Kong-issued insurance policies of all kinds, in addition to providing better health care, beneficiary payments and returns than mainland policies, are also popular because they’re shielded from seizure in the event of bankruptcy in China or criminal proceedings, which have been intensifying under President Xi Jinping’s anti-corruption campaign.

Prompting Travel

The curbs on buying insurance were further tightened earlier this month, when regulators banned using electronic transfers from mainland China to buy life insurance and related investment policies, according to notices seen by Bloomberg News. That prompted many more Chinese to make the trip to Hong Kong to purchase policies using their credit cards, fearful that the rules will be tightened further and all such card transactions will be banned, according to insurance agents.

“Agents who prefer large-amount policies are likely doing their best now to urge clients to buy their products before more stringent measures are put in place,” said Steven Lam, Hong Kong-based insurance analyst with Bloomberg Intelligence. “Mainland customers using large lump-sum insurance polices in Hong Kong as a way to diversify their assets outside China may continue for a while, along with protection needs.”

Free Trips

A Chinese firm that brokers insurance policies, Henan-based Hong Kong Easiness Wealth Management, is offering travel to Hong Kong, including free airfare and accommodation, for mainland Chinese to buy insurance products. Those buying policies valued at more than 500,000 yuan ($77,000) get a first-class ticket plus two nights in a five-star hotel. Such a purchase would require at least 15 card swipes. A first group of four couples was to arrive in Hong Kong on Tuesday to buy critical illness insurance with a 100,000 first-year premium from AIA, while a higher-spending trip was scheduled for May, said Li Yida, the company’s owner.

“We will guide them through the whole process and swipe cards with them," he said. "We’ve told them to bring more than one credit card, as they will be able to try more cards if one of them is not working."

Other family members of Ng’s client who purchased the HK$28 million in policies traveled to Hong Kong during the weekend after the electronic transfer ban to purchase their own policies worth HK$10 million, requiring an additional 200 swipes of their credit cards, Ng said. The swiping process for the family took about two days each time, he said.

“Multiple swiping of cards is the main way to pay for large-amount policies now, as the online payment channel was blocked earlier this month,” Ng said. "They believe it’s getting more difficult to allocate assets overseas after seeing more government restrictions on insurance purchases.”

Growing Business

Prudential, AIA and other large insurance companies have seen big increases in their Hong Kong business due to mainland Chinese demand. Purchases of insurance and related investment policies by mainland visitors to Hong Kong reached HK$31.6 billion in 2015, a 30 percent increase from the year before and a 219 percent jump since 2012, according to the Commissioner of Insurance’s office.

Apart from swiping their cards multiple times, insurance buyers can buy insurance in excess of the $5,000-per-transaction limit by asking relatives or beneficiaries to group together to pay premiums, or draw on money already moved to overseas bank accounts, according to the agents interviewed by Bloomberg.

Further restrictions would be especially worrying for Chinese purchasers of life insurance products that require payment of a regular monthly premium, said Wendy Wang, an agent for Prudential in Hong Kong, who said she recently swiped a client’s credit card 57 times.

“Investment-related products can be paid by one time, but life insurance is mostly paid every year, or every month if they want to,” she said. “So the life insurance clients worry about their coming payments.”

Chinese coming to Hong Kong to purchase policies appear willing to put up with the extra inconvenience, in part because of fears of further restrictions and concerns that the yuan may depreciate further, said Winson Cui, who manages a team of agents with mainland backgrounds in Hong Kong. Such policies also have more mundane benefits, Cui said.

“Mainlanders have the patience to have their cards swiped a lot of times under new restrictions because Hong Kong’s insurance products have different advantages such as lower premiums and better services,” he said.