Capital flight: The travel channel

Abstract

This paper provides evidence for a rarely studied channel for capital flight: traveling. During an unprecedented period of large net capital outflows in 2014–2016, China’s travel expenditure rose to a level that was abnormally high relative to China’s outbound departures data, counterparty statistics, or by the norm of other countries. I estimated a gravity equation model adapted to travel trade for a panel of countries and found that reported travel expenditure by China was significantly above that predicted by the model during this period. The unexplained travel imports, reaching about 1 percent of China’s GDP during this period, were inversely associated with domestic growth and positively associated with renminbi depreciation expectations against the dollar, suggesting that they were less likely to be consumption of goods and services abroad than domestic residents’ acquisition of foreign financial assets. These results suggest that Chinese households, through the travel channel, had exploited China’s more liberalized capital account in recent years to transfer wealth abroad during periods of elevated economic uncertainty.