Capital Flight: China’s Experience
CESIFO WORKING PAPER NO. 2931
CATEGORY 7: MONETARY POLICY AND INTERNATIONAL FINANCE
To gauge its economic relevance, we plot China’s capital flight and FDI inflow
normalized by its fixed assets investment in Figure 2. China’s fixed assets investment is deemed to be a crucial factor driving its phenomenal growth. The residual method shows that capital flight could be more than 20% of fixed assets investment. The FDI capital is another significant driving force behind China’s phenomenal growth. These ratios suggest that capital flight could easily offset, if not dwarf, FDI flow to China. The economic implication of China’s capital flight is quite obvious if the capital transferring out of China is as productive as FDI.
With all its capital control measures in place, how could China have such volatile capital flight? Anecdotal evidence, indeed, has suggested that capital controls are always porous and (illicit) capital flows are not completely shut. A good share of historical capital movements occurs outside of formal regulations, as indicated by the errors and omissions entry of the balance of payments statistics.
Even in the early stage of China’s open door policy, capital flight is attributed to corrupted officials running state owned enterprises and beneficiaries of corruption and economic crimes.