China’s $3.8 Trillion Hemorrhage

Follow The Money

http://dailyreckoning.com/chinas-3-8-trillion-hemorrhage/

As we covered yesterday, China is starting to hemorrhage money.

How much?

Over the past decade, about $3.8 trillion has left China illicitly. The trend, if you’ll recall yesterday’s discussion, is accelerating. Somewhere around $50 billion per month is flooding out of China.

Today I want to cover the final ramifications of this monetary hemorrhage, and why it matters to your investments and your wealth…

At the individual level, what’s a Chinese saver to do? Over the past decade, the Chinese have sought wealth preservation, if not investment returns, in China’s stock market, as well as in Chinese property markets. These ideas worked out well for some Chinese investors, but not for others. Plus, as I mentioned yesterday, the Chinese buy gold — lots of it.

In addition to investing in Chinese assets — stocks, property, gold, etc. — there’s long been anecdotal evidence of Chinese moving funds offshore in shady ways, as illustrated by the Vancouver story about suitcases full of cash. In other times and other places, I’ve heard similar stories of Chinese suitcase money: in Russia, across the Middle East, in Africa and South America.

There’s an old saying in the field of statistics that “The plural form of the word anecdote is data.” And recently, a number of investigators have gained access to much more hard data about how much Chinese money has moved overseas. The amount of money is huge, to the point of shocking.

When it comes to funds that have moved away from China — and the fate of the individual owners is something else entirely — we’re dealing with what The Economist magazine recently called a form of “voluntary exile.”

The bottom line is that large numbers of Chinese are moving money offshore, by hook or by crook. According to Hurun Report — a Shanghai-based service that caters to a very upscale clientele — the average wealthy Chinese (defined as having a net worth over 10 million yuan, or about $1.6 million) holds 19% of his assets overseas.

Meanwhile, per Hurun, 85% of wealthy Chinese plan to send their children to school outside China, while 44% have plans to emigrate at some point in their life. In and of itself, that’s hardly a ringing endorsement for the future livability of China.

Also, according to a report issued Oct. 25, 2012, by the Washington, D.C.-based Global Financial Integrity (GFI) group, almost $3.8 trillion (yes, trillion!) illegally exited the Chinese economy between 2000 and the end of 2011. About $602 billion left China in just 2011, so the trend is accelerating.

Indeed, if about $50 billion per month ($602 billion divided by 12 months) left China in 2011, it’s no wonder that, for the past year, we’ve seen market-moving reports that China’s economy is slowing down. Perhaps China’s economy isn’t so much “slowing down,” in many respects, as it’s decapitalizing due to illicit outflows.

In the GFI report, the authors state that there are “serious questions about the stability of the Chinese economy.” Furthermore, per the report, “If outflows continue to ratchet upward, adverse repercussions on social and political stability cannot be ruled out.”

In other words, the massive, illicit capital outflows from China contribute to a growing sense of economic inequality, as well as pervasive corruption. The principal author of the GFI report, Dev Kar, formerly of the International Monetary Fund (IMF), opined that “The Chinese economy is a ticking time bomb. The social, political and economic order is not sustainable in the long run given such massive illicit outflows.”

The Chinese system is “not sustainable”? Now, that’s a problem.