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.
It'd be interesting to explore the reasons of the emigration wave. Is there a mainstream factor?
ReplyDeleteIs it government fiscal policy, especially taxation? In China, individuals who earn over RMB 80,000 per month (approx. USD 13,000) before tax submit 45% of their income to the government. In the US, this same income group would be taxed 25%-28%. This comparison may be inappropriate considering the differences in the standard of living between the two countries, but since we are more concerned with the elite income group here, it should be noted that the price levels of normal and luxury goods have become so high in China that they are often multiple times as expensive as they are in the US. Even if we were to compare this with the highest income tax rate in the US, the 35% for individuals with a monthly income of approx. USD 32,361 is still 10% lower than that of China's, but with almost two and a half times the income.
A lower tax rate could be a starting motivation for the Chinese noveau riche to emigrate, but it is not adamant enough a motivation. It can be argued that there are many countries with a much lower tax rate than those of the US and Canada (the favorite emigration destinations in China), some even within China's sphere of influence; the Hong Kong SAR, for example, collects 15% income tax from the highest-earning group. Why the US and Canada, not somewhere much close to home and much more culturally similar? If we were to appease ourselves with the insanely high tax rates, there would still be more issues. Chinese citizens are completely oblivious to the outlets of their tax contributions, whereas in countries like the US a tax citizen would be provided with a detailed report of where every dime of the taxes they paid went. Most countries use taxes to ameliorate public goods (namely health services), but this is not the case in China. Admittedly, public services, especially public transport, have become much better than they were a decade ago, but this is to be expected at a time of peace. In addition, whereas other countries have tax deduction policies for such as one individual supporting an entire family, China have none. This lack of transparency to the public is common in many other aspects of the government, and has led to increasing suspicion on its citizens; those who are financially capable have been relocating assets overseas, and for this reason many have emigrated to countries outside of the influence of the Chinese government.
Some have also claimed that many Chinese people have emigrated overseas to seek a "better" education of their children. I believe this factor this overrated. The financial status of a family is fundamentally decisive for an emigration decision; education is not one of them. If it were not for the parents' concerns of paying useless taxes to the government or of their suspicions of the government, it is very unlikely that the emigration decision would be based on considerations of education. Moreover, being educated overseas does not have to be achieved through emigration; these two items are independent. "Better" education is also euphemistic; many students went to school overseas because they could not endure the rigor of the Chinese education system, not because their parents were necessarily seeking a "better" education.
Last but not least, it is crucial to note that although many Chinese people have emigrated overseas, most of their assets remained in China; in fact, only very few resided overseas (apart from emigration regulations requiring those to reside for a certain time). Most outgoing assets are only temporary investments needed to secure citizenship, and would eventually come back to China. Of course, there is no guarantee that this would not change; perhaps in the near future, more Chinese people would be more residence-oriented in their emigration outlook.