crisis in china
Wealthy Chinese Send Their Money Elsewhere

People’s Bank of China Governor Zhou Xiaochuan came out on Sunday to say, basically, that despite what you may be hearing, everything is fundamentally under control in China. Bloomberg:

The nation’s balance of payments is good, capital outflows are normal and the exchange rate is basically stable against a basket of currencies, Zhou said in an interview published Saturday in Caixin magazine. That’s an escalation in verbal support after such comments have been left in recent months to deputies and the central bank research department’s chief economist.

Many wealthy Chinese citizens don’t seem to agree, and it’s led, for example, to the proliferation of a practice called “smurfing.” According to The New York Times, smurfing is the name for one of the ways that people are using to get money out of the China. Since there is a $50,000 limit to how much money any one person can take out of the country per year, wealthy Chinese citizens often ask their friends or others to carry money out of the country for them. The practice isn’t new, but it’s becoming a bigger problem because of China’s economic troubles—and capital flight will in turn likely make those troubles worse:

If the government cannot keep citizens from rushing to the financial exits, China’s outlook could darken. The swell of outflows is a destabilizing force in China’s slowing economy, threatening to undermine confidence and hurt a banking system that is struggling to deal with a decade-long lending binge [. . .]

China is also trying to put the brakes on outflows, by tightening its grip on the country’s links to the global financial system. The government, for example, just started to clamp down on people’s use of bank cards to buy overseas life insurance policies.

Accelerating capital flight puts pressure on the economy and especially the yuan. Although Zhou says there’s no scheme in the works to make capital controls more strict, we wouldn’t be surprised to see an already-anxious government take more extreme measures to clamp down on its people in order to keep them from taking money out of the country. As we’ve noted, the biggest reason to worry about China is not the economic problems the country faces per se. The most troubling indicator is that the government may be losing confidence in both the country’s future and the loyalty of its citizens. We expect capital flight to exacerbate tensions between officials in Beijing and many of the country’s more well-heeled citizens—which means it’s becoming easier to imagine how things could get uglier in China sooner rather than later.

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