No Big Money Exit

By Lan Xinzhen

No Big Money Exit

By Lan Xinzhen

China is still the most attractive destination for foreign investment

T he international media is once again draw ing attention to China’s capital flight. In an October 22 article,The Wall Street Journal, using figures on trade and foreign exchange reserves issued by the National Bureau of Statistics, the central bank and the General Adm inistration for Customs of China, concluded that in the past 12 months through September, about $225 billion of capital left China, equivalent to about 3 percent of the nation’s econom ic output last year.

Some Chinese scholars also believe in the outflow of capital. Zhang Ming of the Chinese Academy of Social Sciences (CASS), estimates that from the fourth quarter of 2011 to the second quarter of 2012, $182.8 billion flowed out of China, w ith a monthly average of $20.3 billion.

Compared w ith the monthly average outflow of 14.1 percent from the fourth quarter 2008 to the first quarter 2009, the present capital fl ight is even more serious than the situation following the outbreak of the U.S. subprime crisis. Zhang’s estimation was made by deducting the monthly trade surplus of goods and the actual increase of monthly foreign direct investment (FDI) from outstanding monthly funds in foreign exchange.

Zhang Yongjun, Deputy Director of the Department of Research at the China Center for International Economic Exchanges, says that in the second quarter foreign exchange reserves decreased despite the trade surplus and that there was a sharp decline in FDI, proving that capital is flow ing out of China, likely because of the European debt crisis and of capital returning to the United States and Europe.

Accompanying capital fl ight are om inous messages from the international media, which hold out little hope for the Chinese economy w ith lurid headlines like “China Doomsayer

Sees Crash Com ing” and “China’s Econom ic Situation in Its Most Critical in 30 Years.”

Is there really capital fl ight in China? The Global Investment Trends Monitor report released by the United Nations Conference on Trade and Development (UNCTAD) on October 23 takes a different view. In the fi rst half of 2012, China absorbed $59.1 billion of FDI inflows, surpassing the United States for the fi rst time and becom ing the world’s largest recipient country.

In the foreign exchange market, ow ing to the third round of quantitative easing (QE3)being carried out in the United States, the Chinese yuan faces pressure to appreciate again. The spot exchange rate of the renminbi hit a record high of 6.2422 per dollar in morning trade on October 25, almost reaching the 1-percent appreciation lim it per trading day allowed by the central bank.

When a large amount of hot money eyes China again, no investor is w illing to transfer money out of China and abandon the opportunity for big gains while the renminbi is appreciating.

China’s foreign exchange adm inistration does not seem concerned about capital flows.An official from the State Adm inistration of Foreign Exchange (SAFE) who w ished to remain anonymous toldBeijing Reviewthat they have a strict foreign exchange monitoring system and did not detect any circumstance that needed special attention.

No rm a l flow s

According to the SAFE’s definition, capital flight refers to the unapproved and illegal outflow of capital beyond the actual control of the government. Capital flight exists in both developing and developed nations, w ith the aim of avoiding foreign exchange control,country-specific econom ic risks and political instability, or for tax evasion, money laundering and transferring assets.

HU GUOLIN

According to a statement by the SAFE,not all capital outflow is necessarily capital flight. Most flight is legal and includes approved repayment of foreign loans and interest, overseas direct investment, purchase of foreign securities, trade credit, etc. Even among capital outflows that counter regulations, some are used for legal investments and business operations, simply to evade the overly complex approval procedures or reduce other transaction expenses.

With an analysis of calculations on China’s capital flight byThe Wall Street Journaland some scholars, it can be said that such capital outflows follow the normal flows of investment and should not be a cause for panic.

The decline of FDI is a worldw ide trend.According to UNCTAD figures, in the first half of 2012 global foreign direct investment inflows reached $668 billion, a decline of 8 percent compared w ith the same period in 2011. There was steep drop in capital to the United States and a moderate decline in flows to the EU. The slow and bumpy recovery of the global economy, weak global demand and elevated risks related to regulatory policy changes continue to reinforce the wait-andsee attitude of many transnational companies toward investing abroad.

In recent years, China’s overseas investment has grown rapidly. According to figures from the M inistry of Commerce (MOFCOM),in the fi rst half of 2012, China’s overseas investment grew more rapidly than FDI. These statistics show that such normal overseas investment causes a decline in foreign exchange reserves.

The SAFE figures may be more convincing. In the fi rst half of this year, China’s cross-border payments increased 24 percent from a year ago. Of the total, overseas direct investment grew by 74 percent, while capital w ithdrawal such as w ithdrawal of FDI and securities investment and rem ittance of investment income grew by just 15 percent,meaning that most of China’s “capital fl ight”is for investment abroad.

Certainly there is capital flight in China,but the volume is small. Huge fortunes seized from illegal activities such as corruption, bribery, smuggling and tax evasions are a major source of capital fl ight.

Given China’s strict approval on overseas investment, some companies and individuals seek to transfer or retain their capital abroad w ithout approval w ith the aim of making investments. Some other companies transfer funds abroad and then bring them back to China as foreign investments in order to enjoy favorable policies.

Wu Xianghong, an independent economics commentator, says capital flight has not yet become a trend in China, at least for now.Because of QE3, the U.S. dollar faces depreciation in the short term, and currencies such as the renm inbi are appreciating. This has to some extent curbed depreciation of the renminbi and capital outflows from China.

Wu says QE3 is an indefinite blank check issued by the U.S. government to expand the dollar supply. Therefore in the next six to 12 months, the dollar supply w ill be eased.During this period, Chinese authorities should be concerned about asset appreciation caused by the pouring of dollar assets into China, instead of capital fl ight.

Liu Yuanchun, Vice Dean of the School of Economics at Renmin University of China,says although the Chinese economy is slowing, the econom ic situation is improving.Furthermore, the balance sheets of the real economy, the financial sector, the central and local governments as well as overseas investment and the foreign trade sector indicate that the Chinese economy is still healthy.Doomsday reports are unfounded.

Still attrac tive

A ccord ing to figu res released by the MOFCOM on October 19, in the first nine months this year, the number of new ly approved foreign-invested enterprises and the amount of paid-in capital both declined, but in some sectors, foreign investment grew remarkably. For example, foreign investment in the retail and wholesale sectors rose by 6.7 percent, in the construction sector by 27.8 percent and in the information transm ission,computer service and software industries by 32.8 percent.

Given that most foreign investment in the past was in manufacturing, the above-mentioned industries w ill be major grow th points for China’s paid-in capital.

However, most foreign investors still choose China’s eastern regions as a top investment destination. From January to September,paid-in capital to the east amounted to $70.22 billion, accounting for 84.2 percent of the national total, while that to the central and western regions stood at $6.99 billion and$6.22 billion, or 8.4 percent and 7.4 percent respectively.