News that China’s foreign exchange reserves rose by $10bn (€8.85bn) in March, rather than declining, has quieted doomsayers.
Worries that the reserves could dip to dangerous levels as soon as this summer — after shrinking by an estimated $1tr last year — appear to have been premature.
Still, questions linger over exactly how much money is leaving China and why. The true picture may not be as rosy as the headline numbers suggest.
Before the March upturn, capital had been flooding out of China at a rapid clip — an average of $48bn per month over the previous six months, according to official bank data.
The reasons were several. Fearing further declines in the value of the yuan, several companies paid off their dollar loans; others pursued big acquisitions abroad. Individual investors sought out higher returns as the Fed prepared to raise rates. The government spent billions to prop up the value of the currency.
Some individuals and companies reduced their offshore yuan deposits. Still others looked to spirit money out of the country to safer havens.
The question is how much money has been leaving for which reasons. Some analysts, including economists at the Bank for International Settlements, have argued that the bulk of these outflows are healthy, mostly involving companies paying down their foreign debt.
However, the BIS study, which estimates that such repayments accounted for nearly a quarter of the $163bn of non-reserve outflows in the third quarter of 2015, focuses on a very narrow slice of time.
Foreign debt obligations grew rapidly in late 2014 and the first half of 2015, then shrunk dramatically in the third quarter.
Moreover, what those official figures miss are hidden outflows, disguised primarily as payments for imports, which appear to have created a $71bn current account deficit in the same quarter, according to bank payments data. In effect, enterprising Chinese are overpaying massively for the products they’re importing.
Chinese customs officials reported $1.68trn in imports last year. Banks, on the other hand, claimed to have paid $2.2trn for those same imports. While the official balance-of-payments records a current account surplus of $331bn in 2015, banks’ payments and receipts show a $122bn deficit.
Overpaying for imported goods and services is a clever way for Chinese companies and citizens to move money out of the country surreptitiously. Let’s say a country exports $1m worth of goods to China.
Chinese customs officials will faithfully record $1m in imports. But when the importer goes to the bank, he’ll either use fraudulent documentation or bribe a bank official to record a $2m payment.
The discrepancy began to grow rapidly in 2012, just as growth peaked and concerns began to rise among affluent Chinese about the economy and a political transition. Since then, fake import payments have grown from $140bn to $524bn in 2015.
In that period, growth in China has slowed, rates of return on investment have declined and surplus capacity has exploded. Investment opportunities have shrunk, while state-owned enterprises have crowded out private investors.
Certainly the latter have good reason to seek better returns elsewhere.
At the same time, president Xi Jinping’s anti-corruption drive has netted tens of thousands of party officials. Naturally, well-to-do Chinese are worried about being caught up in the dragnet even if innocent.
Scrutinising bank payments more closely and tightening capital controls would help slow down outflows. But just as businessmen discovered this new channel to move money offshore, they’re almost certain to find creative ways around any additional limits that are imposed.
The Chinese economy is groaning under massive overcapacity, with growth slowing and financial risks rising. Neither a cut in interest rates nor another stimulus package is going to relieve that long-term pessimism.
Reform — including legal reform — may. If China’s leaders want to prevent capital from leaving the country, they’re going to have to address the reasons for the flight, not just erect roadblocks in its way.