By over- or under-charging for exports or imports, say, US$5 million for a shipment actually worth US$4 million, the foreign party can park extra cash in China. This has the benefit of providing a legitimate-looking paper trail.
A foreign investor sends in more money than needed for an approved project. The money grows as the yuan appreciates.
Informal business networks raise money abroad, usually in Hong Kong and Taiwan, and often involving family relationships. This is likely one of the most prevalent channels for hot money, according to Peking University professor Michael Pettis.
Illegal private banks often have close connections with local governments, and are used primarily by mainlanders in Hong Kong or Taiwan, according to Zhang Ming of the China Academy of Social Sciences (CASS). Typically, a non-yuan deposit will be made at the private bank, the bank converts the money into yuan and remits it into the depositor’s mainland account for a service charge.
Foreigners can bring up to US$50,000 a year into China. A weak banking system means that a foreigner could theoretically open accounts with different banks and deposit more than allowed with little chance of detection.
Zhang Ming of CASS says that donations to poverty-stricken areas in China have become a source of hot money in recent years. A scenario, which he describes as “extreme,” would be that a foreign investor sends in a donation, half of which is diverted to speculative investments under the terms of the donation.