Corruption, costs, and family: Chinese capital flight, 1984-2014

- Since 2005, China has experienced a acceleration of capital flight reaching $425 billion (plus/minus $60 billion) in 2014.
- The accumulated capital flight of the last thirty years is $3.2 trillion (plus/minus $1 trillion).
- Capital controls change the preferred method of capital flight but have little effect on the volume of such flight.
- Capital flight since 2005 was not caused by overvalued exchange rates, political uncertainty, or relaxed capital controls.
- Likely causes of recent capital flight are corruption, income inequality, transaction costs, and desire to migrate.

Since 1984, the foreign debt of the Peoples' Republic of China has increased at a greater rate than would be explained by changes in the country's current account, foreign direct investment and reserve holdings. This pattern is consistent with large-scale outflow of financial capital, commonly referred to as capital flight. Since 2005, capital flight has accelerated reaching $425 billion (plus or minus $60 billion) in 2014 alone. This study provides three estimates for capital flight from China for the period 1984 through 2014 using both Cuddington's balance of payments and more inclusive residual measures. These measures are adjusted to reflect the legitimate assets of the Chinese banking industry, mis-invoicing of China's trade with its major trading partners (especially Hong Kong), exchange rate changes, and the failure of official debt data to capture certain bank transactions. Based on these estimates, it is concluded that capital controls have little long-term effect on the volume of capital flight, Hong Kong is increasingly a pipeline for capital flight from the mainland, and that 'traditional' explanations do not apply to China's capital flight over the last decade. Finally, corruption, transaction costs, and facilitating migration are considered as possible explanations of the recent acceleration of Chinese capital flight.

High and low estimates of Chinese capital flight: 1984-2014 ($ billions).Source: Fig. 2: Adjusted capital flight measures in Gunter (2017) “Chinese Capital Flight: 1984-2014”.172