China's Capital Flight, 1990–1999: Estimates and Implications

Despite a trade surplus of US$43.6 billion and FDI inflows of US$45.6 billion in 1998, the stagnant growth of China's official foreign exchange reserves of just US$5 billion during the year has raised concerns about leakages in the system. This has refocused the attention of Beijing officials and foreign investors on the problem of capital flight in China. There, entities and individuals involved in the illegal transfer of funds out of the country usually do so not only because of higher returns available outside the country, but also because of domestic uncertainties such as corruption/smuggling, concerns over policy oscillations and a yuan devaluation. While capital flight cannot be measured directly or with precise accuracy, it can be estimated using a method that treats capital flight as being a "residual". This method has been employed by economists in the Bank for International Settlements and World Bank to estimate the amount of capital flight from emerging economies. The "residual" method estimates the amount of capital flight from a country by analysing the difference between reported capital flows and their actual movements. This paper presents these quantitative estimates of China's capital flight. From these estimates, several implications for the stability of the yuan and the Chinese economy in general are discussed.