Capital flight from the People's Republic of China: 1984–1994

Abstract

Since 1985, the foreign debt of the Peoples' Republic of China has increased at a greater rate then would be explained by changes in the country's current account, foreign direct investment and reserve holdings. This pattern is consistent with the large scale outflow of financial capital, commonly referred to as capital flight. This study provides a range of estimates for capital flight from the PRC for the period 1984 through 1994 using both Cuddington's balance of payments and the residual measures. These measures are adjusted to reflect the legitimate assets of the PRC banking industry, mis-invoicing of PRC trade with its major trading partners (especially Hong Kong), and the failure of official debt data to capture certain bank transactions. The results are consistent with the view that a combination of high domestic financial transactions costs, inappropriate exchange rates and political uncertainty continue to result in large scale capital flight from China.