Chinese Investors Moved More than $3.79 Trillion Out of Country Illegally

By: EW News Desk Team   Date: 29 October 2012

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29 October 2012

Chinese investors evading government controls have channelled $3.79 trillion in illicit financial outflows from 2000 through 2011, according to a report by Global Financial Integrity. In 2011 alone, China lost over $600 billion – more than any other country in the last ten year period.

At the same time, the group also found that a significant part of the illicit outflows from China is “round-tripped” back to the country as recorded foreign direct investment, disguised to win tax breaks and other incentives from the government.

In one example, the group found that the British Virgin Islands accounted for $213.7 billion in official investment in China in 2010, despite having a population of just 28,000.

The authors of the report, Illicit Financial Flows from China and the Role of Trade Misinvoicing, wrote:

One of the adverse effects of illicit flows from China has been a worsening of the country’s income inequality as the rich get richer through tax evasion (which comprises by far the major portion of such outflows) and through using the world’s shadow financial system to shelter and multiply their illicit wealth.

The report also said that 86 percent of the money moved abroad, or $3.2 trillion, was moved out of China through "trade misinvoicing," under which Chinese companies arrange with foreign suppliers to overcharge for imported goods and deposit the extra money abroad.

The outflows are a reflection of widespread frustration and a loss of faith in China’s financial elite, as well as the central government, which channels most bank lending and other benefits to state-owned companies at the expense of savers and entrepreneurs.

Illicit financial flows have been shown to exacerbate inequality and corruption, two of the biggest challenges facing China today. 

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In a statement, the group said the findings “raises serious questions about the stability of the Chinese economy.”

Dev Kar, chief economist and co-author of the report, said:

The Chinese economy is a ticking time bomb. The social, political and economic order is not sustainable in the long-run given such massive illicit outflows.

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