Changing Nature of Chinese Capital Flight
I have written previously about one key way that Chinese firms and individuals moved large amounts of money out of the country by falsifying import invoices. As a simple example, customs reports an import invoice of $100 but the banks report paying $150 for the imports. An additional $50 leaves China as disguised capital flight.
Now in 2016, after, I wrote about this discrepancy, the value of the difference between these two numbers collapsed. From March 2016 to December 2016, the average difference between Customs reported imports and bank payments for imports was a net outflow of $16.65 billion. In the ten months prior it averaged $44.55 billion. That is a major drop and went a long way to reducing disguised outflows. In 2015 alone, $525 billion in capital left China this way and in 2016, this number collapsed to $272 billion a drop of almost 50%.
However, Chinese firms and individuals figured this out. What you can typically count on is that as Chinese regulators tighten up on outflow channels, there will be a delay of 3-6 months as Chinese figure out new ways to get money out of China.
In 2016, outflows via the import overpayment dropped from $192 billion the first half to $80 billion in the second half. This is where it gets interesting, capital movement via the export discrepancy channel moved from a $48 billion inflow into China in the first half of 2016 to a $100 billion outflow in the second half of 2016.
This is an enormously anomalous shift in exports reported at customs and bank receipts. Since January 2013 through June 2016, export overpayment resulting in capital inflows into China resulted in a total $379 billion in disguised inflows into China.
In this case, the capital flight works slightly differently. Assume a Chinese firm exports a $100 value widget to a foreign customer. The foreign customer transfers $75 through international banking channels to pay the Chinese firm in China but sends $25 to a non-Chinese bank account. There is an implied $25 in capital flight.
If we add up the trade discrepancy outflow measure using both capital flight measures for both imports and exports, 2016 was about 30% less than 2015 but still the second highest year on record. What is quite obviously happening is that Chinese firms and individuals are balancing more of their capital flight between import overpayment and export underpayment.