Capital Outflows from China and the Hidden Story in China’s FDI Statistics

© 2015 Prof. Farok J. Contractor, Rutgers University

Permission to Reproduce: A version of this post was published as  “The Chinese prefer investing overseas; dummy companies may ease transfers and devalue renminbi” by  YaleGlobal Online, September 10, 2015; it was the number-one story in a Google search for “China FDI” that day and is also available as a  podcast.

The global panic in financial markets in August 2015 was catalyzed by the relatively sudden devaluation of the Chinese yuan or renminbi (from 6.2 to 6.4 RMB/$). The Chinese government may have had several reasons for setting the daily reference rate for the RMB at a lower level, for example to signal greater market flexibility or to support its exporters. However, the fact is that enormous amounts of liquid money held by Chinese individuals and companies has—for many years—been anxiously trying to leave China (i.e., leave the RMB as an asset) and park itself in non-Chinese assets such as a Manhattan or Sydney condominium, US stocks, a Singapore bank account, or simply luxury goods. That has created the devaluationary pressure in the exchange markets. … CONTINUED ON ARCHIVE