Why Capital Flows Out of China

Manhattan Chinatown (chensiyuan/Wikipedia)
Manhattan Chinatown (chensiyuan/Wikipedia)

China, although a global hotspot for investments, is currently experiencing huge capital flight. Individuals and corporations, through various methods, are transferring their capital overseas.

An example cited in the 2011 China Private Wealth Report by China Merchants Bank and Bain Capital mentioned that among those who have investments of more than 100 million yuan ($US16.1 million), 27 per cent had already migrated overseas and 47 per cent are considering migrating to the United States.

It is common for people of a developing country to migrate to a developed country. For example, most people from Latin America migrate for better employment opportunities and most people from India migrate for the future of their children’s education. However, 85 per cent of migrants from China continue to live and make a living in China, but possess permanent residency or citizenship in another country.

In a nutshell, the outflow of funds to other countries is not to seek for maximum returns, but to act as a safe haven for their savings and investments.

Capital flight has actually existed in China for many years, but it has intensified recently. The majority of Chinese capital flight involves:

  • Transferring illicit funds – corruption, bribery, rent-seeking, misappropriation of state-owned assets and money seized from smuggling, fraud and tax evasion.
  • Privatisation of public property – unsound supervision and management of state-owned and collective enterprises results in the transfer of assets and profits to overseas subsidiaries or foreign companies. Public property may then be controlled outside of China or even privatised. A considerable number of people, through investment migration, have obtained residency or citizenship in another country, purchased real estate abroad and sent their children abroad.
  • Transferring personal property abroad – owners of legitimate private assets fear forced-confiscation by the authorities. Private business owners therefore obtain an overseas “green card” to transfer capital to countries considered a “safe haven”. However, Chinese domestic regulations strictly control the transfer of capital and the principle amount cannot simply be transferred. Instead, only profits are transferable. This then contributes to illegal capital flight.
US Green Card passport capital flows out of china

US Green Card (Wikipedia)

Those who transfer capital abroad include, but are not limited to, officials of different levels within the Chinese Communist Party (CCP), executives of listed state-owned enterprises (especially those listed overseas) and new wealthy entrepreneurs.

Overseas funds transfers have also become a huge industry. A brokerage manager in Shenzhen said that capital flight is not difficult. He has already successfully brokered many deals on behalf of wealthy Mainland Chinese to invest in real estate overseas.

The rapid growth in foreign investments and exports has contributed to a very large amount of capital flowing into China. Ironically, the soaring numbers of a luxuriously wealthy class in China have contributed to the phenomenon of capital flight.


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