China’s Fake Foreign Investments

(Image:  Junjiewu99  via   wikimedia  /  CC BY-SA 4.0)

Most of China’s wealth is being used to exploit China. For many years, China has attracted an influx of capital, but recently China’s outward flow of capital has been escalating. A Chinese research institution showed that 60 per cent of China’s annual GDP is being used for foreign capital investments.

The Central Committee for Discipline Inspection’s data shows China’s capital outflow continues to increase and exceeded $1 trillion in 2012. Reports from international organisations indicate the funds come back to China as direct foreign investments and are therefore eligible for tax incentives.

On Jan 18, Chinese media cited an internal announcement from the Central Commission for Discipline Inspection. According to their statistics, in 2010, capital outflow was $412 billion; in 2011, it was $600 billion; in 2012, it exceeded $1 trillion. It is expected to reach $1.5 trillion by the end of 2013.

China is subject to such fraudulence in more than one way. University of South Carolina Aiken Business School Professor Xie Tian thinks China’s capital outflow has the potential to cause two other problems in addition to the loss of wealth from internal capital investment:

Xie Tian pointed out that while these types of investments cause multiple threats to China’s economic prosperity, they also confuse China’s economic numbers:

VOA reported that China’s capital outflow usually follows the same scenario. Namely, leaving the country as cash, being used to set up a company in an offshore financial centre and finally the falsifying of ledgers.

Xie said that when Chinese companies buy assets abroad, they typically report a purchase price that is 10 times higher than their real value. They conspire with the Chinese Communist Party’s (CCP) senior officials to transfer money overseas. Another way to use capital is to purchase patents, which is another common approach.

After Xi Jinping took power, CCP officials accelerated their money transfers, Xie Tian said:

Fudan University’s professor Chen Dingli told VOA that China is “bleeding”. Capital outflow by Chinese is only a small portion. The money taken away by foreign investments is 60 per cent of China’s GDP.

Renowned economist He Qinglian discusses fake foreign investments, pointing out that for a long time, a good part of China’s foreign investments have been fake. Money is transferred overseas by Chinese who register a company and the money comes back as foreign investment capital.

According to the CCP, there are three types of ‘fake foreign investments.’ The first type of fake foreign investment is Chinese funded enterprises with business entities in Hong Kong, Macao or other foreign countries that come back to establish “foreign investments” with the need for development.

The second is companies built up with domestic funding that come to invest after registering a company overseas and the third type is a domestic Chinese company that registers as a shell company in financial centres overseas.

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