Capital flight threat to China's economy

Business | Andrew Wong 28 Jan 2019

Trade talks between China and the United States resume this week, but there is little chance of a consensus being reached as the two sides remain far apart and any significant concessions by China would ultimately be counterproductive.

Meanwhile, it was revealed the plunge in a Chinese real estate stock was due to a margin call on stock used as collateral by the largest shareholder.

But more importantly, there are quite a few mainland enterprises facing a financial crunch or their major shareholders with financial problems. Therefore price falls such as these will continue pop up, because of share-cuts.

Of course, the central government can ease the market's debt and liquidity pressure through monetary policy and other means.

But what is most confusing that China's economic growth is still regarded as the best among world's major economies, when one analyses official figures.

If this is so, China should be attracting more capital into its domestic market, but why do we keeping hearing about a lot of rich Chinese who want to transfer their money abroad?

Is it because overseas investment is more attractive or because the rich feel their money is not secure in China?

Large enterprises and rich people in the United States are making huge investments overseas and setting up production factories across emerging markets in Asia, with the goal of reducing production costs rather than fully transferring their assets.

Even though taxes in the United States are hefty and complicated - making these companies open accounts in some offshore areas to avoid taxes - they have no intention of moving all their wealth out of the United States.

They are not to giving up their nationality, either.

But some of China's richest seems to have a different view on how to allocate assets. Though the A-shares market attracted a large amount of foreign investment last year, it failed to stem the flow of money from China to overseas markets.

And this trend has caused the problem - that much of China's local government revenues are far lower than government spending.

Of course it has a lot to do with China's infrastructure spending to keep a level over 6 percent of economic growth, but it also has much to do with China's richest not wanting to keep their assets in the country.

It was recently reported that four Chinese businessmen had over US$17 billion (HK$132 billion) of wealth transferred to family trusts, in the hope that this would protect their fortunes as China's toughens its tax regime.

And while the United States has 160 million taxpayers - accounting for 51 percent of its total population - the number of Chinese taxpayers account for about a mere 5 per cent of the population. What concept is that?

If China's rich only want to benefit when economic growth is good without giving back anything to society, China's economy will be very weak. But it is not easy to reverse this situation because on political, cultural and other factors, and this is why it is so difficult to comprehensively reform China's economic structure.

That is also a key factor as to whether China's economy will have a hard landing in the next five years.

Andrew Wong is an independent commentator.

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