A lot more money is leaving China than it should be.
According to Deutsche Bank analysts led by Zhiwei Zhang, about $ 328 billion left China in secret between August 2015 and January this year.
This is a huge number – about 78% of total capital outflows.
Despite China running a trade surplus of about $ 60 billion a month, the country’s FX reserves fell $ 420 billion in the last few months of 2015 as policymakers spent dollars to replace the missing yuan.
It’s a puzzle, but it’s explained by the way Chinese importers overpay for imports to skirt around controls on capital flight.
Here’s Deutsche Bank (emphasis ours):
We provide evidence in this report, however, to show that misreporting imports and exports is the key way to evade capital controls.
According to official banking statistics, importers in China paid USD2.2tr for goods imports in 2015, yet Customs recorded only USD1.7tr of such imports. On a monthly basis, this discrepancy widens when the market expects more RMB depreciation.
As a way of getting money out of the country, it’s been happening for a while. Here are the charts:
This trend is increasing, rather than decreasing, as the authorities try to get a handle on it. In the understatement of the year so far, Deutsche Bank said:
This suggests the capital controls in China have not been effective. Many investors are worried that if the current pace of capital outflows continues, China may be forced into a large devaluation of Renminbi, which could trigger turmoil in the global financial market.
The Chinese authorities have likely tried to make capital controls more effective in recent months. The pace of decline in reserves has not slowed, which shows the authorities themselves may not know exactly how the capital has flowed out of the country.
And here’s that chart:
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