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Will Capital Flight Kill the Chinese Economic Miracle?
The business news is full of reports and speculation about capital flight out of China. Foreign investment was essential to China’s rapid growth over the last decades. Foreign investors are pulling money out and wealthy Chinese are moving their money offshore. Will capital flight kill the Chinese economic miracle? If so, how does that effect the rest of us? Bloomberg Business writes about the weak spot in China’s $3.3 trillion foreign reserve stockpile.
By almost all measures, China’s $3.3 trillion foreign reserves, the world’s largest, look formidable. Except one. Compared with the amount of yuan sloshing around in the economy, a proxy for potential capital outflows, China’s firepower seems limited. The dollar reserves account for 15.5 percent of M2, a broad measure of money in circulation. That’s the lowest since 2004 and is less than levels in most Asian economies including Thailand, Singapore, Taiwan, Philippines and Malaysia, according to data compiled by Bloomberg.
The low coverage on the money supply does highlight the risk that the buffer can run down quickly if capital outflows, which approached $1 trillion over the last year through November, accelerate. That is perhaps why China has tightened capital controls and stepped up its defense of the currency to damp expectations of further depreciation, which may lead to more money leaving the country.
Rich Chinese who made fortunes as China’s economy grew, are not interested in seeing their wealth depreciate along with the yuan. So, many are moving money offshore from China. This flight of capital drives down the value of the yuan versus the US dollar making it more urgent for other wealthy Chinese to convert their wealth into dollars, yen, euros or British pounds. $3.3 trillion foreign reserve stockpile is huge unless you consider that half a trillion was spent last year supporting the value of the yuan and several hundreds of billion more were spent propping up their stock market. Capital flight is a symptom of China’s problems and a contributor to more trouble. But, why should we care?
Capital Flight from Developing Nations
Capital flight is not just limited to China. According to the South African Rand Daily Mail there is a trillion dollar exodus from emerging markets.