China Analysis Of Capital Flight

Start from a literature review of capital flight in China and other countries, this paper points out that the compliance of capital is the key to determine whether the outflow of capital normal or not under the current foreign exchange administration regime in China, and compares the different approaches calculating capital flight applied in China and other countries, and analyzes the connections between direction approach and indirect approach, and adjusts some of the indicators in direct approach, combined with indirect approach, to calculate the scale of capital flight in China from 1982 to 2007. As the result of the calculation, the 1990s is the peak of capital flight in China, and since the beginning of 21st centaury, the amount of capital flight reduces in a certain degree for the expectation of the RMB appreciation, but the scale of capital flight is still large.There are a plenty of theories discussing the cause of capital flight, but maybe only a few can explain the cause of capital flight in China. On the basis of the comprehensive analysis of the cause of capital flight in the macro-economic, micro-economic and international economic perspective, this paper selects a number of economic variables, such as the economic growth rate, inflation rate, foreign direct investment, interest rate in China and other countries to make a stepwise regression analysis and attempts to find out the most important reason that accounts for the capital flight in China. As a result, this paper sets up a linear regression model including capital flight, foreign direct investment, black market exchange premium and two-year lagged inflation rate, and thoroughly discusses the contribution of these factors for the capital flight.The process of de-regulation of capital control is the history of the reform of foreign exchange administration regime over the past 30 years of reform and opening up. Although China gradually de-regulates capital control, the openness of capital account should be achieved in accordance with Chinese economic development and its financial supervision ability. Hence, a certain degree of capital control will be maintained for a long period in China. By comparing different intensity indicators of capital control used in China and other countries, this paper attempts to measure the intensity indicators of capital control in China since 1994. As the result of the measurement, weak correlation is found between capital flight and capital control. This paper goes on to comprehensively analyze the effectiveness of capital control in China by discussing the independence of the monetary policy, the spread of exchange in the US dollar, capital flow, and the relationship between investment rate and annual saving rate. The result of the analysis is that the effectiveness of capital control in China is insufficient, especially in controlling the outflow of capital.This paper makes an in-depth analysis of the major channels of capital flight, such as under trade items, non-trade items, capital items and etc. By studying the cross-border capital flow between Hong Kong and Mainland China from 1997 to 2007, a considerable amount of capital flows from Mainland China to Hong Kong. At the same time, this paper analyzes the impact of capital flight over Chinese economy from the macro and micro-economic perspective, and tries to find out why the large-scale capital flight since 1990's did not impose great influence over Chinese economy. In conclusion, this paper makes policy suggestions, such as intensifying the reform of financial sector, improving the property protection system, reducing economic distortion, implementing Tobin tax and other effective measures to reduce the adverse effects of capital flight over Chinese economy and prevent the economic crisis and financial crisis during the process of de-regulation of capital control in China.