Moving fortunes out of China is hard: The country imposes strict capital controls that cap individual purchases of foreign exchange at $50,000 a year. Violators can receive big fines, or even prison sentences, if they break the law.
Nevertheless, the stampede for the exit in the past few years appears to dwarf the outflows that occurred in 2015 and 2016, when an earlier property downturn propelled what at the time was the biggest episode of capital flight from China, in dollar terms, according to economists and a Wall Street Journal data analysis.
The Journal’s tally suggests as much as $254 billion might have left China illicitly in the four quarters through the end of June. That is a larger sum than fled the country almost a decade ago, when outflows raised fears of a possible financial crisis. However, estimates of such outflows are inherently imprecise and overall capital flight appears to be smaller today as a share of China’s overall economy, which is now much larger.
Some of the missing money likely includes export earnings stashed overseas instead of being brought back to China in order to take advantage of higher deposit rates and investment opportunities abroad.
Even so, the trend is worrisome for Chinese policymakers. It adds to pressure on the currency at a time when officials are focused on tightly managing it, though recent attempts to jolt the economy with stimulus are buoying the yuan and Chinese stock markets, which might persuade people to keep more money in China for now.
It also underscores waning confidence in China’s economic path among those with the resources and wherewithal to get their money out.
Unhappy investors
People use a variety of tried-and-tested, but risky, methods to get around the government’s restrictions, such as shipping valuables overseas or overpaying for imports. Others are using newer methods such as ferrying computer hard drives loaded with cryptocurrencies to other jurisdictions to convert into hard cash.
Behind the exodus lies the Covid-19 pandemic, government crackdowns on the private sector and widespread fears that China’s go-go days are behind it.
Economic growth is expected to slow to around 3% by the end of the decade, according to the International Monetary Fund, from 5% now and closer to 7% before 2020. China’s epic property meltdown has incinerated an estimated $18 trillion in household wealth since 2021, according to Barclays.
Although Beijing’s latest stimulus measures, which include pledges of new fiscal spending, are likely to boost growth somewhat this year, it is too early to say if they will spark a durable economic turnaround.
Longer-term, the nation faces a fearsome challenge from an aging and shrinking workforce and is enmeshed in conflict with the U.S.-led West over issues ranging from trade to security and technology.
Government officials are trying to make examples of the people they catch violating the rules. In a case reported by state television broadcaster CCTV in September, Beijing police busted a group that helped move 800 million yuan, equivalent to $112 million, overseas by trading in cryptocurrencies.
An earlier case in May involved a person who ostensibly worked at a travel agency but operated an illegal foreign-currency exchange business from Beijing, Xinhua state media reported.
China’s State Administration of Foreign Exchange publishes records of people it has punished for violating capital controls. A man surnamed Liu, from Zhejiang, made 48 illegal foreign-exchange transactions totaling more than $3 million between January 2022 and March last year, according to SAFE’s website, one of 10 similar examples they published in April.
Punishments include fines totaling more than half of the money involved, and could lead to criminal charges.
That capital flight is nonetheless occurring shows how far people will go to get better returns given scant investment opportunities in China, said Martin Lynge Rasmussen, a senior strategist at research firm Exante Data who has studied the phenomenon.
“Five or 10 years ago if you were a Chinese person you could put your money in real estate and have a way of growing your wealth,” he said. “That is not by any means attractive anymore,” though recent stimulus efforts might make domestic stocks more attractive as an alternative and help reduce capital flight, he added.
Paintings and crypto
China began tightening its grip on capital flowing across its borders in 2016. At the time, a real-estate slump, a weakening economy and downward pressure on China’s currency spurred many Chinese to send money overseas. That heaped pressure on the yuan and raised fears about the potential for a wider financial crisis if investor sentiment turned decisively against emerging markets and banks holding Chinese assets suffered heavy losses.
Getting money out of China has become a lot harder, even for rich people with overseas connections in wealthy cities such as Beijing, Guangzhou and Shanghai, according to private bankers and family office employees in Hong Kong and Singapore.
Nowadays, banks in Hong Kong have strict limits for new cash deposits designed to weed out potential capital-control violations. Any customers who deposit more than $10,000 in a week must provide documentation showing the source of funds, said private bankers in the city.
To get around the rules, some business owners set up shell companies overseas in their family members’ names, which are then used to acquire a stake in the China-based enterprise, according to people at family offices that manage Chinese money.
That way, the China-based firm can be redesignated as a Sino-foreign joint venture, which isn’t subject to the government’s caps for individuals, allowing its China-based owners to transfer money to the offshore entity in the form of dividends and other payments. But moving money that way is slow, the people said.
Art offers another route. One person at a major auction house said most transactions nowadays are done by people who want to move money out of China.
The method is simple: A painting or other valuable piece of art is shipped to Hong Kong and sold at auction. But rather than repatriate the proceeds to mainland China, the funds are kept offshore in Hong Kong, in U.S. dollars or another foreign currency. From Hong Kong, which doesn’t have capital controls, the seller can transfer the money elsewhere.
Cryptocurrencies offer new possibilities for capital flight. Though Beijing banned crypto trading in 2021, setting up a crypto wallet isn’t illegal. People in China can use Chinese currency to buy crypto assets with the help of a facilitator. Once they have cryptocurrency in their digital wallet, they can convert those assets into dollars overseas.
Data debate
Estimating capital flight from China used to be straightforward.
Like other places, China reports balance-of-payments data that record how much money enters and exits the country. Ordinarily, international receipts and payments in the data should add up to zero over a given time, with only small discrepancies that disappear quickly.
In China’s case, not only did the sums not add up, but the gaps also persisted—a sign that some money was leaking out illicitly, without being declared.
These sums rose dramatically in 2015 and 2016 and peaked in the 12 months through June 2017 at around $228 billion. The government responded by tightening capital controls and the size of the gaps collapsed.
When the pandemic began in 2020, they started creeping up again and shot up in 2021 and 2022 as people sought ways to get their money—and themselves—out of China and away from its severe Covid-19 policies.
More recently, the gaps have shrunk so dramatically that they pointed to a small inflow into China in the second quarter. But economists say that doesn’t square with generally negative views about China’s economy. It also doesn’t square with large legitimate outflows recorded elsewhere in China’s accounts, which suggest businesses and investors are seeking better returns abroad.
In the second quarter alone, net outflows of direct investment totaled $86 billion, an increase over previous years as Chinese firms accelerated a push to spend more overseas.
Economists including Rasmussen at Exante Data and Brad Setser, a senior fellow at the Council on Foreign Relations, said the incongruity is explained by a change China made in 2022 to the way it calculates its balance of payments data. The change replaced customs data with surveys, which some economists say has the effect of reducing China’s enormous trade surplus and obscures outflows.
In a statement, SAFE said the change was made to “more comprehensively and accurately” measure the country’s balance of payments as trading patterns evolve and that experts outside of the country have said its methodology is “in line with the principles of international balance of payments data.”
Adjusting the data so that it is closer to the way it was calculated before, economists say the evidence of illicit capital flight reappears. Using that measure, the gap in payments data for the 12 months through September 2022 was more than $370 billion, coinciding with Covid-19 lockdowns in major Chinese cities.
Capital flight measured this way has diminished since then, but was running at well above $200 billion in the four quarters through June.
China’s SAFE said statistical gaps in the balance of payments aren’t unusual for large, trading economies and aren’t evidence of capital flight.
—Clarence Leong in Singapore in contributed to this article.
Write to Jason Douglas at jason.douglas@wsj.com and Rebecca Feng at rebecca.feng@wsj.com
