Back in September, in the wake of the PBoC’s attempt to transition to a new FX regime, we recapped the method by which Chinese citizens skirt Beijing’s capital controls. As a reminder, Chinese are only permitted to send $50,000 out of the country in any given year, but thanks to the notorious UnionPay conduit, getting around that limit is (or at least “was”) as easy as “buying” a luxury watch in Macau. The process is remarkably simple. You pretend to buy something with a credit card, receive cash from the merchant instead of merchandise, sign the receipt, and presto, you’ve successfully executed the capital control end-around. Here’s a real world example from Reuters: On a recent day at the Choi Seng Jewellery and Watches company, a middle-aged woman strode to the counter past dusty shelves of watches. She handed the clerk her UnionPay card and received HK$300,000 ($50,000) in cash. She signed a credit card receipt describing the transaction as a "general sale", stuffed the cash into her handbag and strolled over to the Ponte 16 casino next door. Now that China has become particularly sensitive to capital outflows, Beijing is attempting to rein in the shenanigans. Xi’s anti-corruption campaign has helped. As we noted last month, the UnionPay end-around was greatly limited when Xi enacted substantial reforms which limited much of this grotesquely open flaunting of Chinese capital account rules. Indirectly, this has led to the recent collapse in Macau GDP - whose businesses no longer booked billions in fake "transactions" - as shown in the chart below: The problem for China is that there are quite a few reasons to believe that the PBoC is targeting a much larger devaluation before it's all said and done. This keeps the pressure on as the local population, worried about losing purchasing power in the coming months and years, continues to move money out of the country. As the capital flight accelerates, the PBoC is forced into still more FX interventions to prop up the yuan and that means more FX reserve liquidation. Of course those interventions must be offset with RRR cuts in order to preserve liquidity. But the market interprets rate cuts as more easing (even if, when considered with hundreds of billions in FX reserve drawdowns, the net effect doesn't amount to much) which only serves to put still more pressure on the yuan, prompting the entire cycle to repeat itself. Throw in a crashing stock market and it's pretty clear that the outflows aren't set to abate, or, as we put it previously, "it's all about expectations and since China needs to boost exports and stimulate its economy - which is the fundamental reason why it proceeded with devaluation in the first place - any stop gap measures to halt the devaluation are doomed to fail." Now, WSJ is out with a fresh look at China's underground bank industry, where shadowy go-betweens can connect you with Snickers bar salesmen with names like "Mr. Chen" who can help you smuggle millions out of the country via a network of fraudulent accounts. Here's more: In a warren of tiny shops beneath grimy residential towers, a white-haired man selling Snickers bars and fizzy drinks from a kiosk no larger than a cashier’s booth is figuring out a way to move $100,000 out of China. Back to WSJ after that brief interlude: That is twice what Chinese are allowed to send out of the country in a year. Licensed banks won’t do it. But middlemen like Mr. Chen, perched in his mini-mart at the front lines of a vast underground currency-exchange and offshore-remittance network, can and often will. “There’s never a certainty that these things can be done,” said Mr. Chen, who declined to give his full name. “But, usually, when things get stricter, the fee will just be a bit higher.” "Higher fees," because the bigger the risk the "Mr. Chens" of the world are taking, the larger their cut and as we've said on far too many occasions to count, one place the money invariably ends up is in US real estate: Often hidden behind the façades of convenience stores and tea shops, they cater to a clientele ranging from corrupt officials hiding gains to middle-class Chinese trying to buy overseas property. All believe their money is safer abroad or can bring a higher return, a sentiment that has deepened since this summer’s stock-market plunge. New York real-estate agent Jiang Jinjin estimated that families of nearly 2,000 Chinese students at Columbia University are looking to buy residential properties. “I didn’t sleep much this summer. Too many kids looking for apartments,” she said. So "Mr. Chen" and his Snickers bars and tea are ultimately responsible for the housing arrangements of Chinese students in New York, whose parents are probably more than happy to pay a premium which helps to explain the soaring cost of living in the city. Thanks "Mr. Chen." Back to WSJ: Much of the activity has moved to cities near the border with Hong Kong and Macau, former foreign colonies with more-open financial systems. Once mainland money gets to Hong Kong, for instance, it can go pretty much anywhere in the world. Sometimes, large sums are divided into legally allowed amounts and then channeled out of the mainland via hundreds of bank accounts controlled by the underground banker. Underground banks also can match yuan deposited with them on the mainland with equivalent amounts in foreign currency paid into a client’s bank account elsewhere. Of course these are underground operations after all, which means you shouldn't expect things to always go as planned, something a Mr. Chan found out when he tried to smuggle CNY63 million out of the country via one of the many "Mr. Chens": In 2012 when Chan Tat, an elderly Hong Kong businessman, sought to move 63 million yuan from his mainland business to Hong Kong for his retirement. Mr. Chan tapped a friend at a commercial bank, who turned to a Shenzhen underground bank. It split the money into three batches. Each was divided into dozens of smaller chunks, then routed to separate bank accounts controlled by the underground bank, before being wired to Hong Kong. Once in Hong Kong, the money was regrouped in an account controlled by Mr. Chan. All except for eight million yuan he found missing. Mr. Chan, who couldn’t be reached for comment, tipped off Chinese authorities, according to the police account. Chinese autorities subsequently arrested 31 people, and just to give you an idea of how truly ubiquitious this practice is, the bust netted 1,087 accounts holding some CNY12 billion. The 31 suspects were never heard from again. Literally. The go-to method among "runners" like "Mr. Chen" - or like "a young man in yellow loafers named Zhuang" whom WSJ also profiles - is "matchmaking" and despite how it sounds, that doesn't entail connecting you with a Chinese bride: With direct remittances under scrutiny, runners say a preferred method is matchmaking: Give the underground bank a sum, and a matching sum appears in Hong Kong, minus a cut of anywhere between 0.3% and 3%. No money physically or electronically crosses the border; the match is built on networks on both sides controlled by the underground bank. Yes, the "sum appears in Hong Kong," and after that, it's gone, which helps to explain why China will need to continue to interevene in the offshore market, as the spread between the onshore and offshore yuan (which disappeared amid a flurry of intervention in September) is now blowing out again: Finally, for any concerned Chinese intent on circumventing capital controls on the way to protecting your purchasing power, we would note that there are other ways to move money out of the country without transacting with "Mr. Chen" and his yellow loafers at a "tea shop," and on that note, we leave you with the following chart...