Source: http://www.bearishbull.com/?p=36
“MAINLAND China can
now boast over 1m wealthy citizens (qianwan fuweng) each
with over 10m yuan ($1.6m), says the latest edition of the “Hurun Report”,
which keeps track of China’s capitalist high-roaders. But the mainland seems to
be having trouble keeping them. According to the report, published on July
31st, more than 16% of China’s rich have already emigrated, or handed in immigration
papers for another country, while 44% intend to do so soon. Over 85% are
planning to send their children abroad for their education, and one-third own
assets overseas.
The affluent 1m have profited handsomely from China's economic boom. But only 28% of those asked expressed great confidence in the prospects over the next two years, down from 54% in last year's report. That unease may also be visible in a more obscure report released on the same day, by China's State Administration of Foreign Exchange (SAFE). It showed that China's balance of payments had recorded a deficit in the second quarter, for the first time since 1998. Put simply, more money was leaving China than arriving.
The affluent 1m have profited handsomely from China's economic boom. But only 28% of those asked expressed great confidence in the prospects over the next two years, down from 54% in last year's report. That unease may also be visible in a more obscure report released on the same day, by China's State Administration of Foreign Exchange (SAFE). It showed that China's balance of payments had recorded a deficit in the second quarter, for the first time since 1998. Put simply, more money was leaving China than arriving.
The
same phenomenon can be described less simply. The balance of payments records
two different kinds of transactions: cross-border payments for goods and
services (ie, exports and imports), which are recorded in the “current
account”, and cross-border payments for assets. China’s current account is
still in surplus, largely because its exports exceed its imports. China is also
attracting plenty of direct investment from foreigners eager to buy or build
companies on the mainland. But both these inflows of foreign exchange were
outdone by a record outflow of other kinds of capital, amounting to a net $110
billion. This left China’s overall balance of payments in deficit, diminishing
China’s international reserves by $11.8 billion (or just under 0.4%)”
Source: http://www.economist.com/node/21559949
Looking at the situation with rising exchange rate and
overall balance deficit, the chief China economist at Nomura Zhiwei Zhang thinks,
“the capital outflow is not an alarming sign in itself, but just reflects
economic worries that are already well-known”. People are moving their assets
from China abroad because they sense a kind of structural weakness and
instability in China’s markets and thinks it is much better, and safer to place
capital somewhere else.
Victor Shih
from Northwestern University pointed out China’s three structural weaknesses.
Below is taken from his 2011 paper, I have emboldened the key points.
"China has three structural causes of
capital flight. First, wealth in China is highly concentrated. Using three different methodologies based on
survey data, data on large share holders of listed company, and data on the
total financial and real estate assets in China, the wealthiest 1% urban households command between 2 and 5 trillion USD
in wealth.
· A 20% reallocation of this wealth overseas would cause a substantial but likely controllable drainage of China’s
foreign exchange reserve.
· A 30-40% reallocation of this wealth overseas would see the depletion
of China’s foreign exchange reserve by close to 1 trillion USD or more.
· Second, underground banks, false trade invoicing, and now an
experimental scheme
to allow individual investors to invest overseas provide multiple channels for
capital to circumvent China’s exchange control.
· Third, real deposit interest rates are negative and will remain so in the foreseeable
future, thus prompting wealthy households to speculate overseas on a large scale if relative returns suddenly
decrease in China.
· If the top 1% of households in China
reallocates 1 trillion USD of their wealth overseas, the central bank then will
be faced with a choice between large
scale quantitative easing and an illiquid banking system.
· In the short term, China’s only
recourse to reduce the volatile state of its foreign exchange reserve is to
bring real interest rates back to
positive territory."
Source:
http://ineteconomics.org/sites/inet.civicactions.net/files/BWpaper_SHIH_040811.pdf
So is this
going to be a problem for China? Right now, no; but in the long run, without
proper government control, yes.
