Tag Archives: capital flows

A $2.7 Trillion Plunder of China

More money flowed out of China illicitly over the decade to 2010 than out of the next nine countries together on Global Financial Integrity’s (GFI) newly published list of countries whose wealth is being syphoned off abroad by crime, corruption and tax evasion.

We are talking serious money that is finding its way into offshore tax havens and developed countries’ banks, even allowing for GFI’s conservative tallying of the sums. Total outflows from China in 2001-2010 were $2.7 trillion; the next nine countries collectively, $1.7 trillion, with Mexico the largest individual country with illicit outflows of $476 billion. Over the decade, China’s illicit outflows have accounted for just under half the world total.

China’s average illegal outflows amount to $274 billion a year. Easing of capital controls has, if anything, increased the flow of hot money. By virtue of its enormous economy, though, China has an outflow to GDP ratio that is lower than many developing countries. It is still an enormous theft.

The heavily preferred method of transferring illicit capital is through the corrupt misinvoicing of trade. GFI calculates that the trade misinvoicing is larger than 10% of exports in almost all years. China’s “social, political, and economic order…is not sustainable in the long-run given such massive illicit outflows,” says GFI Lead Economist Dev Kar, one of the authors of the report.  If the new Xi leadership needs reasons for cracking down on corruption, GFI has 2.7 trillion of them.

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Hot Money And Cold Reality

Hot money, fickle by nature, may be turning its back on China. Figures showing that banks were net sellers of foreign currency in October for the first time since May last year suggest just that. They sold 24.9 billion yuan ($3.9 billion) worth in October versus buying 247.3 billion yuan worth in September. Reasons could be various: dollar flight in the face of the euro crisis; cooling property prices; expectations of near-term yuan appreciation evaporating. Be cautious, beyond our usual one month’s figures warning, of taking the numbers as a bearish sign for the economy that might turn the current “fine tuning” of monetary policy into something looser. The central bank says that credit is abundant and inflation remains relatively high.

Footnote: The central bank’s comments came after it broadened its M2 definition of the money supply, effectively bringing in the banks’ off-balance sheet lending, implicitly acknowledging that the old measure underestimated the money supply, and made it an unreliable benchmark of whether monetary policy was being effective.

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