China's one-percenters make ready to take the money and run

China's wealthy elite is increasingly making offshore moves -- surveys indicate that the Chinese hyper-rich are keenly aware that they have a lot more than their neighbors, and the government might one day decide to take it away. So money is flowing out of China, and if the Mainland one-percenters all go, it'll tank the Chinese economy.

In case you are not already familiar with Prof. Victor Shih’s theory about capital flight from China, enough capital outflow from China (US$1 trillion or more) would cause huge liquidity problems in Chinese banking system, and the wealthiest 1% of Chinese households would be enough to cause that shift of capital should they decided to leave the country, move the money away, or whatever. And that shift might be happening already (albeit rather slowly), as manifested in the slow but consistent money outflow away from China since late last year, which, as we said, is already tightening liquidity in the banking system, now necessitating multiple rounds of liquidity injection in China.

Rich Chinese flee | | MacroBusiness (via Naked Capitalism)

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MORE: china • class war • corruption • economics • one percent • politics

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aaronmhill

Is “capitalist” a dirty word in China, like “communist” here?
- dioptase
  
  Nope. In fact, when I’m there, I’m often subjected to long tirades about how awful communists are. In public. People don’t say much about capitalism. They are too focused on making money.
  
  In short, there is a Communist Party, but there are very few communists. (ok, even if only 1 in 100, 1% of 1.3 billion might technically be a shitload of communists)
  - ChicagoD
    
    Well, it seems like there are a lot more members of the Communist Party than there are communists, so to speak.
    - Antinous / Moderator
      
      How much “representing” goes on in the House of Representatives?
    - Jonathan Roberts
      
      Joining the party is a good way to get ahead in your company or get help with university, so it makes sense to many people who have no politics or who are even critical of the system.
ChicagoD

Wait, how can this be? Remember, all of the London and New York bankers were going to move to Shanghai and make unlimited amounts of money if their play was restricted?
spejic

It seem an inevitable end to the creation of a class with the utterly uncontrolled and uncontrollable power to destroy everything and no responsibility to or respect for their home country.
tomrigid

This sort of volatility is the price of China’s rapid modernization. If their central planners are able and willing to extend the schedule of current investment they’ll be able to reduce the near-term risk posed by this sort of capital flight. Some will see that as a claw-back, and flight will occur, but if they are well-guided, cautious, and committed to their program then it should be affordable. More importantly, this gives them (and us, outside of China) the best chance of avoiding an auto-catalytic global meltdown, which is nice.
http://twitter.com/fossilfuels Funk Daddy

So that would be 13 million people give or take probably more including entourage and relations. I hope they all move to the same city outside China o r build a new one just for them, that’d be fucked up and make for some excellent documentaries and movies.
- jandrese
  
  Or they could just move to Dubai. Seems like they would fit right in.
  - http://twitter.com/fossilfuels Funk Daddy
    
    That’s what I mean, if they did that the people of Dubai would be the ones struggling to fit right in. There’s like 5 million people in Dubai, it’d be a wild ride to drop 13 million plus chinese immigrants, all wealthy, even over a decade.
Charles Céleste Hutchins

Where will all the capital fly to? Every industrialized country keeps hearing about capital flight, but this requires a stable target currency. If everybody is ditching dollars, euros, yen, yuan, what are they going to buy? Of if they’re not converting the currency, just stuffing it in foreign banks, presumably those pay some kind of interest and therefore do loans and stuff. Where are they?
- ChicagoD
  
  Vegas, baby!
- Navin_Johnson
  
  Singapore? Sea Palaces?
- dioptase
  
  People aren’t ditching dollars. One bit of proof: T-Bills have an effective negative rate. People are paying Uncle Sam to hold their money. Why? It’s the least crappy option.
- xiagang
  
  Hong Kong.
http://twitter.com/Dogsbody_D Mark Ridley

I presume they will come and live in London and make the house prices even effing higher.
ZA_SF

I’m just amused the antiquities train has essentially never ended. http://www.chinaheritagequarterly.org/features.php?searchterm=004_palacemuseumprehistory.inc&issue=004
dioptase

Couple of fun facts:

- Income inequality has been higher for several years in China than it was during the revolution. (I wish I could find the source. Sorry)

- Government officials in China are extraordinarily wealthy. http://www.bloomberg.com/news/2012-02-26/china-s-billionaire-lawmakers-make-u-s-peers-look-like-paupers.html
- Layne
  
  Yep – Foreign Times did an article on just how badly the Chinese system is riddled with corruption and cronyism.
  When govt has a say so in everything you do – right down to reproducing – the people running it tend to get conveniently showered with gifts from people wanting to sway their decisions. Ugh.
  
  I imagine a large subset of these wealthy people are bureaucrats who’d need to hoof it pretty quickly when their scam gets exposed.
Boundegar

The thing is, we throw around numbers like one percent, but one percent of China would be over a trillion people. If even one percent of them fled, it could reverse the rotation of the earth. And then where would we be?
- http://twitter.com/fossilfuels Funk Daddy
  
  uh we’d be going back in time and getting younger and shit like when superman did that thing, my question is where the trillion 1% will be when time reverses, same thing I asked superman, he said “stfu kid” and flipped me the bird
  - Boundegar
    
    Oh hell. What if they fled back into the womb, and then Paul Ryan got them US Citizenship?
- wysinwyg
  
  Related: xkcd’s last “What if”
  - ocker3
    
    Good Lord that scares me!
- J Ascher
  
  The actual number would be around 12 million since China has about 1.2 billion people in it.
xiagang

Back in the late 90s and early 2000s, it was common to hear financial types talk about all that FDI flowing into China. By 2003/4 it was hovering somewhere between US$50-70 billion (I forget the exact years and amounts, but this is in the ball park). Trouble is, that a lot of direct investment from offshore was just mainland money round tripping. Wealthy mainlanders took their money out of China (illegally), washed it in Hong Kong, and invested it into China (where as “foreign investors” they received tax breaks, free or cheap land to build factories, export assistance, etc). It was one of the greatest swindles of all time. Some people who looked at this closely suggest up to 50% of all money invested by foreigners in China was actually Chinese money round tripping.

In those days, these guys made a lot of money. Exports were booming, profits were still fairly good, and everyone was laughing all the way to the bank. Today, it’s not the case. So instead of round tripping, the big money is taking a one-way trip. The first port of call is Hong Kong. Want to know why Hong Kong is booming when the EU and US are broke? Take a look at the money pouring into this place (I live in Hong Kong) from the mainland. Talk to Hong Kong locals about property prices (sky rocketing on the back of crazy prices paid by mainlanders who just want to park their money somewhere safe). And once that money is here in Hong Kong, well… it can be transferred anywhere you like. I have seen bus-loads of mainlanders taken to luxury residential buildings still under construction and people buying two flats for US$4.5 million with cash (not literally a suitcase of cash, but transfer of cash without the requirement for a bank loan).

I know a lot of wealthy people in China. Almost without exception, they are putting some of their money into investments in Hong Kong. And once the money is in Hong Kong, the world is their oyster.

BTW: taking money out of China is tough business. The government syphons off a considerable proportion if you do it legally via bank transfers. People prefer to use underground methods (some as simple as walking across the frontier at Luo Hu (the border point between Hong Kong and China) with large amounts of money in a suitcase. Others transfer larger amounts of cash by numerous other methods. Sometimes people are caught and exposed, but Hong Kong is awash with black money.

The other popular destination for mainland money is Macau and the casinos. Vegas doesn’t come close to Macau’s turnover (I can’t recall the figure, but I guess Macau has a turnover 3-4 times that of Vegas), and most of the money in Macau comes across the border (a short walk).

However, the Chinese economy won’t tank because rich mainlanders take their money out. It will tank because of corruption. Taking money out of the country is just a symptom of corruption. You get rich in China through corruption, but once you have a lot of money you want to get it as far away from this corruption as possible.

But Shih is basically right.
atimoshenko

I’m not sure why this would be a problem for China. Financial wealth is not productive capital – it is the promise to hand over productive capital if asked for. Moving financial capital does not move barrels of oil, roads, or factories. Indeed, money is a token signifying wealth created (though not necessarily by the person who managed to acquire the money) but not yet consumed, so running away with a bunch of money leaves actual assets the same but makes the claims on them more tenuous. Now, in an economy free from government interference, those promises to reward previously produced wealth and had over productive capital are still rather powerful. In China’s case, however, the government (in matters critical to its own political survival) can easily dispossess any ‘escapees’ on an ad hoc basis. Not enough liquidity? Print more cash and send everyone a cheque.
aeon

Lets hope China works out a way of keeping their rich kleptocrats and their money in China, it’s a win-win situation if they do. If they emigrate it’s a loss to both sides — China loses their money and the rest of the world gains a group of crass, ill-mannered, loud, self-centred, uncultured idiots who are a detriment to the countries they end up in. Trust me, I lived there and know just what China’s nouveaux riche are like.
- J Ascher
  
  I suppose the Chinese government could put a limit of say one million yuan per year on out-of-country transfers. Since China is centrally-controlled, it should be fairly easy to enforce this.
  
  Of course, corruption in the hinter and not-so hinterlands would be problematic.
TheMudshark

No problem – just tailor all legislation and tax regulation so that no rich person ever has to contribute anything to society. If every country in the world does it, none of them will loose their precious rich folk and everybody´s happy, right?
hakuin

so, one dirty bomb in Hong Kong would topple China.