A Study On Capital Flight In China During Its Transitional Stage

Capital flight, which is prevalent in developing countries, particularly in countries with economic system transition, stands in the way of economic development. Being the biggest developing country in the world, China is also plagued with the serious problem of capital flight. Employing analytical approaches of modern economics, this dissertation intends to conduct a thorough research into the capital flight in China during the stage of economic system transition. After taking a literature review home and abroad, the dissertation attempts a connotative definition of the capital flight in China during the stage of economic system transition. Using the indirect measurement approach, composite approach and interest balance adjustment approach, the dissertation attempts a precise measurement of the amount of capital flight in China during the years 1982-2004. Through the research, the dissertation identifies some distinctive traits revealed in the capital flight in China during the transitional stage: relatively larger scale, with marked phase; involving large amount of transitional capital flight; having a minor impact upon China's economy.How the capital flight proceeds in China during its transitional stage? The dissertation researches into various capital flight channels: current account, capital and financial account, underground channels, etc; and argues that the openness in current accounts, capital and financial accounts undoubtedly exerts an influence on the scale of capital flight. The dissertation attempts to determine the indexes of China's economic openness degree based on the openness degree of commodity trade and service trade (substantial economy level), and that of direct investment and indirect investment (financial level). Through cointegration analysis, the dissertation does an empirical study on the correlation between capital flight in China during the years 1982-2004 and various indexes of openness degree of China's economy, and draws a conclusion that the scale of capital flight has a positive cointegration relation with the openness degree of overall economy, of commodity trade, of direct investment and of indirect investment, however, a negative cointegration relation with that of service trade.Why large scale of capital flight happens in China during its transitional stage? Theoretical analysis indicates that China's economic system transition inevitably begets capital flight, and empirical study identifies major factors begetting capital flight: the real exchange rate depreciation of RMB, the amount of foreign loans, the growth rate of international reserve and economy, which has significant statistical correlation with the capital flight in transitional China.In analyzing the impact of capital flight on economy, the dissertation finds that although capital flight had no disastrous consequence to macro-economy, it does have negative impact on China's economic development. As an abnormal capital flow free from government supervision, capital flight is bound to endanger the economy. The dissertation conducts an in-depth analysis of the impact of capital flight upon China's domestic economy, reform and opening-up, and social security and stability. Through an empirical study on the relation between the capital flight in China during its transitional period and China's economic growth, the dissertation finds that the capital flight does not deal a destructive blow to China's economy. The dissertation elaborates that the capital flight in China is on a relatively normal scale, there is no shortage of investment in China during its transitional stage, and China's international economy maintains sound development. The dissertation argues that in spite of relatively minor hazard at the present stage, if we do nothing to reverse the trend, once the macro-economy goes worse or the incremental reform encounters tough challenges, the accumulated impacts of capital flight will break out, dealing a tremendous and destructive blow to the economy, even triggering financial and economic crisis.In the recent years, with huge surplus in China's balance of payments and capital inflow for consecutive years, and more appreciation pressure on its RMB, the issue of capital flight is addressed to some extent; nevertheless, the dissertation argues that the fundamental factors triggering capital flight have been virtually little touched in transitional China, moreover, new features will emerge in the capital flight with China's accession to WTO and further expansion of its opening-up scope. What counter measures shall be adopted to address the issue of capital flight? As the dissertation proposes, the guidelines are: deepen political and economic restructuring, eliminate the factors triggering capital flight, control the scale of capital flight, and weaken its negative effects. To be more specific: firstly, speed up financial reform. Promote the reform of interest rate and exchange rate; relax financial restriction to create conditions for citizens to make investments abroad; cultivate and improve capital market. Secondly, establish the modern property system. Define the boundary of property, and resolve the phantom problem regarding property owners; guarantee the equal status of private property in legal terms, and the validity of capital income. Thirdly, establish the supervision mechanism against capital flight so as to block the channels of capital flight. Set up coordinated financial supervision network against laundry, and further speed up international cooperation; establish mechanism monitoring the authenticity of current accounts; improve mechanism monitoring capital and financial accounts; track down illegal capital flight; set up alarming mechanism against capital flight.