Monday, 12 December 2016

The Chinese Dragon - riskier than you think?

China is in the process of aggressively and rapidly expanding its hegemony around the world and it is building up its military might. However, the biggest risk posed by this superpower lies in the financial sphere and it is resulting in people and capital leaving the country at unprecedented levels. 

China is embroiled in dangerous geopolitical adventures in the South China Sea, making grandiose territorial claims and building artificial islands. It reaches into other countries to silence critics, is becoming more repressive and remains an authoritarian one-party state. It suffers from high levels of pollution and corruption. These tendencies are making many wealthy Chinese anxious and looking for a way out.

China is already the largest source of regular emigrants in the world, with more than half-a-million Chinese immigrants settling in the OECD bloc in 2013 and millions more are waiting their turn.    China is also the largest source of investor-class emigrants and as pointed out previously, in many host countries Chinese make up close to 80% CBI applicants. Chinese buyers now the largest source of foreign investment in the U.S., Canadian and Australian residential property markets, driving prices sky-high. 

10% of China’s billionaires have already emigrated and more than half of its 1.3 million millionaires plan to leave of the country in the next five years - that is about 650,000 or about 130,000 per year until 2020. Whether they will succeed is anybody’s guess, since only 9,000 managed to leave last year.

China is experiencing large capital and migrant outflows - between US$450 billion and US$1.2 trillion of capital left China last year, often in the suitcases the millions of Chinese emigrants and tourists. Chinese emigrants are allowed $50,000 per year, but this is not well-enforced and desperate Chinese emigrants simply smuggle their cash across borders. For example, border guards at the Vancouver airport seized $13-million in hidden currency over the past two years, that is in addition to the $323-million of declared currency (over $10,000) by Chinese tourists.
Apart from capital outflows, China has $28 trillion in outstanding loans. Its credit-to-GDP gap is now three times over the danger threshold and much higher than the US subprime bubble. Its total credit of 255% of GDP poses a risk of a full-blown banking and systemic financial crisis, with obvious consequences for  migration flows: The hypothesis is this: the greater the economic risk, the faster Chinese money and emigrants move offshore. The faster they move offshore, the greater the fear that stricter capital controls will be implemented - Which in turn could speed up the exodus in a pre-emptive effort to avoid the clampdown – once the clampdown occurs, there will be a dramatic slowdown of both people and capital.