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Arguably the biggest challenges facing China now are more social than economic.|
A casual visitor to Macao might be struck by the number of expensive watch shops along the streets of the former Portuguese enclave now under China’s control. The shops cater to Chinese tourists who aren’t really seeking the latest fashionable timepiece so much as a way to get money out of China. In many cases, the bejewelled baubles are paid for with a credit card, then promptly returned with the obliging shopkeeper refunding cash rather than negating the credit card transaction (albeit with a slight discount).In January, revenues at the casinos of Macao were up 35 per cent year on year, as a result of all the mainlanders flooding in to welcome the year of the water dragon. Such junkets are widely believed to be another way to get money out of China, evading the legal limit on cash taken out of the country (Rmb20,000/$3,100) by gambling on credit and then receiving any proceeds in (foreign currency) cash outside China itself. In Tokyo, bankers and property brokers speak in amazed whispers of Chinese nationals paying for real estate with debit cards. Meanwhile in Singapore, government officials say recently enacted measures to discourage property speculation are directed at the newly rich of China rather than the usual Indonesian tycoons.
Capital flight out of China has been part of the landscape for many years. That money comes from a mix of party officials, the lucky executives of state-owned enterprises that have listed (especially outside China) and newly wealthy entrepreneurs. But in times of political transition the flows outside China become ever more intense. In October, the 18th Party Congress will take place, signalling the beginning of a series of changes at the top. Nobody knows what the consequences of such shifts entail as the protected lose their patrons.
The money that flows out is the bolt-hole money, money that is not looking for the highest returns (which are still to be found at home) but the safest haven. Those flows reflect the insecurity of the wealthy. While some of their money is legitimate, some of it is not. Very few entrepreneurs will reveal where and how they got their seed capital, keeping the beginnings of their corporate empires shrouded in mystery. There are properties across urban China whose owners have not repaid their mortgages but banks don’t dare foreclose because of their powerful party connections.
Wealthy Chinese have joined foreign investors in demanding more secure property rights which is fine for legitimate money but does not really work for the other kind.
The other side of the coin of the burgeoning fortunes of the elite of course is the rising discontent from the have-less and have-nots that arises precisely because of the sense that the money washing across China and into the region and across the pacific is mostly ill-gotten.
The errors and omissions in China’s balance of payments ($60bn in 2010) suggest tens of billions might be involved in such capital flight though it is difficult to distinguish between hot money outflows and capital flight. Some of the discrepancy in the numbers is a result of foreign exchange arbitrage and some of it is more questionable flows.
As sentiment about the renminbi grows more pessimistic, more money might leave China. Currently, there are lots of reasons why the prospects for renminbi appreciation have dimmed. The trade surplus is a fraction of what it used to be and the outlook for exports isn’t great.
Stephen Green, an economist at Standard Chartered Bank in Hong Kong, expects the current account surplus to shrink from a probable $250bn last year to only $140bn this year. Mainland reserves dropped from $3.2bn to $3.18bn by the end of the year and may drop further, as China slowly shifts to a more domestic demand-led economy.
Citing these factors, many of the smartest foreign exchange traders have reversed their bet on the swift appreciation of the Chinese currency. In December, renminbi deposits in Hong Kong dropped 6 per cent from November, the largest fall ever, reflecting broadened capital flows and more balanced current account dealings.
Mr Green notes that it is possible that hot money has been flowing out for years but in the past it has been overwhelmed by inflows and therefore was less visible. The visibility is a big part of the problem.
Arguably the biggest challenges facing China now are more social than economic.
Victor Shih, a US academic, has estimated that the liquid and property wealth of the top 1 per cent of the Chinese population ranges from a possible $2tn-$5tn. At the other end of the spectrum are those who are not even in the cash economy. The gap is too wide.