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.





Telegraph (Australia)




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