New report claims Chinese foreign investment ‘vastly
exaggerated’ by round-tripping
29 October 2012
Illicit outflows of funds from mainland China
now exceed USD600 million a year, according to a report by the
lobbying group Global Financial Integrity (GFI).
The fund exodus has increased dramatically
since 2000, when the number was estimated at USD173 million.
Excluding trade with Hong Kong and Macao, cumulative illicit
financial flows from China between 2000 and 2011 totalled USD3.79
trillion.
About a quarter of the illicit outflows end up
as cash deposits or financial assets in foreign financial centres,
GFI claims. The preferred laundering mechanism is a technique
called trade mis-invoicing, under which Chinese companies collude
with foreign suppliers to be overcharged for their imports. The
surplus cash is then deposited abroad.
About 52.4 per cent of investments that flowed
into international financial centres from China during 2005-2011
were illicit while 47.6 per cent were legitimate, claims GFI.
GFI Director, Raymond Baker said the illicit
drainage of Chinese funds is far higher than anything experienced
by any other emerging economy, and posed a serious danger to the
stability of China's social and economic order.
Much of the illicit outflows are round-tripped
back to the professional regulation commission as foreign direct
investment from international financial centres, according to GFI.
This implies that the official Chinese statistics heavily
overestimate the reality of foreign direct investment (FDI).
Moreover, says the report, much legitimate
money also leaves China as FDI into Hong Kong and then onto the
British Virgin Islands (BVI), from where it is reinvested in China
as FDI to take advantage of favourable tax regulations. This
mechanism has made the BVI the second biggest foreign direct
investor in both mainland China and Hong Kong, and the largest
recipient of FDI from Hong Kong - despite having a population of
about 28,000 and a gross domestic product of only around USD1.1
billion.
Sources
GFI
Telegraph (Australia)