Illegal capital flight remains a major threat to China's financial
stability, but its threat has been minimized with proposed measures
for a looser foreign currency environment.
Scholars also urged for better legal protection of private property
rights and reform of the floating exchange rate system to eliminate
the potential for capital flight.
"The current rosy macro economy can reduce the incentive for
capital to leave, though further reforms to create a more open
market environment are needed to basically stem the activity," said
He Fan, a senior financial researcher with the Chinese Academy of
Social Sciences (CASS).
Guo Shuqing, director of the State Foreign Currency Administration,
also claimed last week that with a strong macro economy and the
stable renminbi, the incentive to transfer capital overseas for a
more favorable interest rate has been weakened.
In
China, capital flight refers to the transfer of capital to overseas
destinations without the ratification of the country's foreign
currency regulators.
After strictly controlling foreign currency outflow for a long
time, Guo's administration declared last week that it would
introduce a series of new measures for enterprises and individuals
to better obtain and transfer foreign currencies.
While praising the new measures for loosening conditions for the
overseas business activities of Chinese firms, economists also
worry that the move could pave the way for capital flight, already
a serious challenge to China's economic development.
Capital: Booming economy foils outflow
The amount of capital that leaves China is difficult to estimate
due to its secret and often illegal nature. Some economists
estimate the figure for the period 1997-99 at nearly US$90
billion.
Ren Hui, a senior researcher with the State Foreign Currency
Administration, the major government organ responsible for curbing
the outflow, estimated the amount at US$53 billion.
Even Ren's low estimate is equivalent to more than 30 percent of
the total foreign investment into China in the same period.
According to Ren, most of the capital that leaves the country
illegally is obtained through corruption or aims to earn profit in
overseas markets without ratification of the proper
authorities.
"Except the corruption which fosters capital flight, motives of
capital escape have been reduced by China's booming economy and the
greater chance for investment return here," He of CASS told
Business Weekly.
The foreign currency administration officials also reiterated that
after a peak period in 1998, when a renminbi devaluation was widely
expected, capital flight was largely thought to be on the
downturn.
However, without clear legal protection for private property in
China, the threat of private entrepreneurs transferring their money
overseas is still a concern.
But He said it was not worth worrying about because most private
capital flowing overseas would return under the name of foreign
investment, which could enjoy favorable tax treatment in China.
What is lost during the process is mainly government tax
revenue.
Yet Zhong Wei, an economist with Beijing Normal
University, argues that the massive amount of private capital
flowing overseas is not only sparked by investment but by safety
concerns as well.
"The need for a constitutional amendment that adds the principle
that private properties are inviolable has become quite urgent to
curb private capital outflow," said Zhong during an interview with
Business Weekly. "Without the principle, private
entrepreneurs always fear their assets are endangered."
On
the other hand, Chen Bingcai, a financial researcher with the
Institute of International Economics under the State Development
Planning Commission, suggested a loosening of foreign currency
regulations as a solution to the problem.
According to Chen, a large amount of the capital leaves to seek
investment opportunities overseas, but because of China's strict
controls on foreign currency, investors have to transfer their
money illegally. With a freer environment, most of the capital
would return when the domestic market offers more
opportunities.
Along with reform of foreign currency regulations, experts
recommend the replacement of the current fixed rate policy with a
floating foreign currency rate system, which would allow the rate
of the renminbi to fluctuate according to the market.
According to He, under the fixed rate system, risks could
accumulate and eventually break out when the macro economy
deteriorates.
"To avoid the outbreak of risk, a floating rate system which could
gradually release risks with market fluctuation is quite
necessary," he said. The current stable economy and the sufficient
foreign currency reserve offer the best opportunity to carry out
the reform.
(China
Daily May 28, 2002)