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An EZ Pass for Capital Flight

Mrs. He Qinglian is a renowned economist and jornalist from China. Her book “The Trap of China’s Modernization” became a bestseller and an authoritative reference book for China’s economists. The Japanese translation of the book was also highly acclaimed. The updated version is now being translated into English. Because of her explicit views and analyses of China’s economic truth, based mostly on government released data, she is disliked by the authorities and has been forced into exile. She is now staying in the U.S. as a guest researcher.

The following is her comments on the impact of a new regulation regarding money transfer issued by the People’s Bank of China.

On November 16, 2004, People’s Bank of China surprised everyone with a new rule called, “A Temporary Rule on Transferring Personal Assets Overseas.” The essence of the rule: Chinese citizens can take their personal assets when they move abroad; there is no upper limit on the net worth of the properties one can transfer.

The media reactions to the new regulation are very polarized. State media in China unanimously praised the move. Both experts and officials strived hard to calm excited responses by people, saying that the new rule would not result in capital flight. On the other hand, on various Internet forums, people widely accused the government of giving corrupted officials the green light to move illegal money out of China safely.

Apparently, the new rule issued by the Central Bank is not a mere fantasy concocted overnight. Still, most people are really puzzled by the announcement. Merely two months ago, this same government declared in all sincerity that Bermuda had become the staging ground for China’s capital flight and “swore” to stop such conduct. One would wonder whether such a sudden policy reversal comes from the same government.

How much capital flight does China suffer? Even the Chinese government has different versions of this story. As of 1995, there had been a consensus amount, namely, that capital flight surpassed 50 percent of the increase of the foreign debts between 1985 and 1995.

Following Venezuela, Mexico and Argentina, China won fourth place in terms of the amount of capital flight occurring back in 1995. After 2000, however, there have been many different versions of the amount, most of which come from government organizations or official media. Nobody knows exactly which version is correct.

According to the 2003 mid-June issue of the Ban Yue Tan (Semi-monthly Forum) magazine, at least 4,000 officials fled China, carrying with them US$5 billion. I verified this number in a January 18, 2001, news fax from Xinhua News Agency. Many newspapers quoted this “authoritative” number back then. I even used it once.

It has been widely circulated in 2004 on the Internet overseas that within the first half of 2003, as many as 8,000 officials fled China with an unspecified amount of money. This piece of news was later confirmed to have come from the February 4, 2004, issue of Hong Kong’s Wenhui newspaper.

Legal Evening reported on July 23, that the Ministry of Public Security held a press conference in May and disclosed that there were still over 500 suspects who fled China, carrying over 70 billion yuan (US$8.5 billion). On the other hand, Legal Evening also reported on August 16 that the data from the Ministry of Commerce showed that there were over 4,000 Chinese officials who fled China and carried away a net worth of US$50 billion.

Because of the huge discrepancy in terms of the number of corrupted officials fleeing China (500 versus 8,000) as well as in the amount of capital flight (US$5 billion versus US$50 billion), it is difficult to judge which number is more accurate.

In fact, the damage of capital flight to the domestic economy is well-known, especially because China’s capital flight is largely associated with corruption. In such circumstances, why would the Chinese government give the green light for capital flight? In today’s China, which group of people needs to move huge amounts of assets and emigrate abroad? Who will be the beneficiaries of the new policy of capital transfer overseas?

Normally new immigrants in developed nations come from two major sources: the family based immigration and the study-and-then-work based immigration. In both cases, new immigrants do not have significant assets, and therefore do not have a need to transfer their properties overseas in large quantities. Obviously, China’s new policy of opening the door for asset transfer overseas is not designed to satisfy the need of average citizens. Instead, it is to satisfy the need of “successful people” who are anxious to transfer their assets overseas. As is demonstrated, “successful people” who are truly interested in emigrating abroad with assets fall into two categories: various government officials and business people who have amassed their personal assets via power-money exchanges. The reason why these two groups of people are willing to sacrifice their high social status in China in exchange for the marginal status abroad is certainly related to their expectations for China’s future. If these two groups widely hope to emigrate overseas with their assets, it demonstrates that according to their observations the China “boat” is already showing signs of capsizing. They want to “abandon ship” and escape.

The tremendous amount of money many Chinese officials own is amassed mostly through illegal means. The fact that the Chinese government is now opening the door for China’s richest to emigrate overseas with great amounts of assets indicates that all the anti-graft slogans from the regime are merely to cover up the crimes of the officials and to deceive ordinary people. The recent issuance of the “Temporary Rules on Transferring Personal Assets Overseas” by the People’s Bank of China is most likely because of the success of the lobbying by many government officials and business people to “capitalize” the country. Once again, they succeeded in persuading the central government to remove all the obstacles against shifting their capital abroad. With the new rule, they no longer have to take any responsibility for their graft and embezzlement.

The economic policy in favor of the smaller rich population surpasses those of any ultra-Right governments in the world. The ultra-Right economic policies combined with the ultra-Left ideological and cultural policies now prevail in China’s unique political environment.