China Herald: Not to worry about capital flight

Sara Hsu

About US$142 billion in capital left China in April and June, triggering off some concerns. But according to financial analyst Sara Hsu writes in the Diplomat, here there is no reason to worry. China is encouraging outbound investment programs, and then it is hardly a concern when capital actually leaves the country.

Sara Hsu:

Cross-border capital outflows are also being liberalized to some extent as part of China’s financial reform agenda. Financial funds can move out of China under the Qualified Domestic Institutional Investor scheme, the Qualified Domestic Individual Investor scheme, which is in the trial phase, and soon under the Qualified Domestic Retail Investor program. Foreign direct investment abroad is also growing rapidly as China seeks to build the One Belt, One Road program and continues overseas investment for the purposes of gaining resources, technology, and know-how. Capital controls continue to guard to some extent against excessive financial and direct capital outflows from China.

If capital flight were indeed taking place, chances are that this would also be reflected in “hot money” flows out of the country, since the capital account is not fully open. Some of the funds may be moved through remittance companies, which are visible, or through other means such as underground money houses, which are invisible in the capital or financial accounts, and viewable only in the errors and omissions category of the balance of payments. Net errors and omissions have been relatively large and negative from Q3 2014 through Q1 2015; Q2 2015 data is as of yet unavailable. Q1 2015 saw unaccounted-for outflows that weighed in at about $66 billion. This does not mean that hot money outflows are definitely occurring, but that this is a possibility.

Still, it appears that the scale of capital outflows, legitimate or illegitimate, do not present a real threat to financial stability. What is more, some volatility in the capital account can help Chinese officials to prepare the economy for greater shocks given further capital account liberalization. At present, the level of control over capital flows is relatively strong and China-watchers need not lose sleep over potential capital flight.

More in the Diplomat.

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