China’s economy continues to slump, with a looming real estate crisis. To avoid becoming targets of the Chinese Communist Party’s exploitation, more and more Chinese citizens are seeking safer havens to store their wealth. Amid the watchful eyes of the authorities, a significant amount of capital is being transferred out of China.
According to statistics from The Wall Street Journal, in the four quarters leading up to the end of June, as much as $254 billion may have evaded Chinese regulatory scrutiny by flowing out of the country, surpassing the amount of funds that fled China nearly a decade ago.
The combination of pandemic lockdowns, crackdowns on the private sector by the Chinese government, and general concerns over the waning period of China’s economic boom has prompted affluent Chinese individuals to park their funds in overseas accounts to take advantage of higher interest rates and investment opportunities abroad, instead of bringing the money back to China.
The trend of capital outflow has raised alarms within the Chinese government, leading to even stricter capital controls. Individuals are now restricted to an annual foreign exchange purchase limit of $50,000. Violators face hefty fines and even imprisonment.
Banks in Hong Kong have also imposed stringent restrictions on new cash deposits, aimed at curbing potential violations of capital control measures. Private bankers in Hong Kong state that clients depositing over $10,000 a week must provide documentation proving the source of their funds.
Despite these measures, capital flight continues to occur, as highlighted by senior strategist Martin Lynge Rasmussen from Exante Data. This underscores the relentless pursuit of better returns given the scarce investment opportunities in China.
People are employing various tested yet high-risk methods to circumvent the restrictions imposed by the Chinese government. Some opt to transport valuables overseas, while others pay exorbitant fees for imports. More innovative approaches include shipping computer hard drives containing cryptocurrencies to different jurisdictions to convert them into cash.
Art provides another avenue for capital transfer. According to an individual from a major auction house, most transactions are now initiated by individuals seeking to move their funds out of China.
The process is straightforward: individuals transport a painting or other valuable artwork to Hong Kong for auction. However, the proceeds are not repatriated to mainland China but are held in Hong Kong in the form of USD or other foreign currencies. Sellers can then transfer the funds to other destinations from Hong Kong, which lacks capital controls.
Moreover, sources from family offices managing Chinese funds reveal that some business owners are setting up shell companies overseas in the names of family members to circumvent Chinese regulations. These shell companies are then used to acquire shares of Chinese enterprises.
This enables the Chinese company to be re-designated as a Sino-foreign joint venture, exempt from the Chinese government’s restrictions on individuals. This allows Chinese owners to transfer funds overseas through dividends and other forms of payment. However, insiders note that the pace of fund transfers through this method is slow.