Pittsburgh Tribune-Review September 16, 2012
Corruption enables trillions to slip out of China
By Lou Kilzer and Andrew Conte
Political and business leaders in China are illegally placing hundreds of billions of dollars in offshore bank accounts, drastically undermining one of the world's largest economies.
In a country with strict monetary controls intended to prevent such a financial exodus, a quickly fading economy and political uncertainty have accelerated the departure of money over the past 12 months, experts tell the Tribune-Review.
But even before the spike, the mainland hemorrhaged cash into the international black hole of secret offshore bank accounts. In a 2008 report briefly posted on its website last year, the People's Bank of China said 16,000 to 18,000 corrupt officials had fled the country, taking with them their families and $123 billion.
Today that figure stands at the low end of estimated amounts of currency leaving China. At the high end, one estimate from Washington-based Global Financial Integrity says corrupt trade officials let more than $2.5 trillion slip out.
"People are voting with their feet" said John Pike, director of GlobalSecurity.org, an unrelated accounting firm.
The consequences of so much money fleeing China could be dire.
"The government doesn't want there to be a panic" Patrick Chovanec, professor at Beijing's Tsinghua University's School of Economics and Management, told the Trib. Without control, he said, the results could be "unpredictable and significant."
Others say talk of a drastic impact on China goes too far.
Derek Scissors, a China expert at the Heritage Foundation, a Washington think tank, said China's foreign currency reserves will allow it to weather this, although he predicted "there will be dislocations."
Because China has a closed monetary system in which U.S. dollars cannot be converted into Chinese money, the country's huge reserve of foreign cash is more easily used to buy overseas assets than to shore up national banks that depend on a controlled currency, Scissors said.
Last week, China acknowledged a changing banking situation but maintained capital outflows were not significant.
Shell game
Despite speculation about how much money left the country and when, there's little secret about how it leaves - through the same route that made China a Goliath: trade.
Dev Kar, a former senior economist for the International Monetary Fund, said that corrupt officials move money by "misinvoicing exports" sending hundreds of billions of dollars into nearly untraceable offshore shell company accounts.
The result, Kar said, is that "China is a ticking time bomb." Some money departs through supposedly foreign-owned companies doing business in China that are not subject to the same strict currency controls as native Chinese companies, said Jonathan Winer, a former State Department money laundering expert.
"The entire phenomenon involves systemic, massive Chinese customs and tax fraud" Winer said in an earlier report.
Many of those foreign companies used to export currency are interlocked through holding companies and subsidiaries in Hong Kong, the Cayman Islands and other secrecy havens, Winer said.
A Tribune-Review analysis this year showed that many of these firms start as shell companies in the United States, even though major stock ownership and almost all physical assets remain in China.
Telltale signs
China's problems surface just as the country has acknowledged a major economic slowdown and as its leadership, beset with corruption allegations, prepares to appoint a president. People have speculated about the power transfer since the heir apparent, Vice President Xi Jinping, canceled meetings with foreign dignitaries including Secretary of State Hillary Clinton. He appeared in public for the first time in two weeks on Saturday, the official Chinese news agency Xinhua reported. No explanation was given for his absence, which fueled widespread speculation.
Signs of the slowdown are extensive.
Late last month, the U.S. Chamber of Commerce said a survey showed 21 percent of U.S. companies in China "are planning to diversify some investment or business from China" to other Asia countries in "the next two years, significantly higher than when asked in 2011." Xinhua reported this month that iron ore backed up at 25 ports as steel demand plummeted and prices collapsed.
The effects are felt here, too, where Cecil-based Consol Energy Inc. idled two coal mines in West Virginia and Virginia because of slumping demand from China and other export markets.
China's electrical demand has fallen, too. Power consumption grew 4.5 percent in July nationwide, and only 3.6 percent in the telltale industry and manufacturing sector - a figure less than half of China's growth projections.
"The weak power consumption was mainly dragged down by a surprise industrial output slowdown in July" according to Xinhua.
A growth rate of just 3.6 percent might seem healthy in a world still trying to recover from the 2008 financial crisis, but China's long-term building and economic strategy has been funded by assuming faster growth.
"China has to run just to stay in place" Chovanec said.
Like 'Speed' movie
Last month, an Australian publication used a more colorful metaphor to describe the situation, likening China to the 1994 movie "Speed" in which Keanu Reeves pushed Sandra Bullock to drive a bus above a certain speed to keep it from blowing up.
China has little margin of error on the downside, experts say. The bus cannot head into a dead end or even face speed bumps.
If a banking crisis develops, experts say it will trace back to the inability of domestic banks to cover for a slowdown by continuing to roll over bad loans. Faced with the global financial meltdown in 2008, China's leaders injected about $630 billion into the economy. That worked at first, but Xinhua reported this month that "commercial banks are facing a high risk of increased bad loans, partly due to a lending spree to support massive economic stimulus three years ago."
The real situation might be worse. Local governments are preparing stimulus measures 70 percent to 380 percent larger than those in 2008, according to the Chinese business website Caixin. The People's Bank reported that in August, new lending pumped a record $111 billion into the economy.
The exodus of money threatens the stimulus attempt, according to Northwestern University professor Victor Shih. Because he started working for the Carlyle Group hedge fund, Shih told the Tribune-Review that he couldn't expand on the threat warning he raised last year at a meeting in Bretton Woods, N.H.
Those comments, though, demonstrate that trouble might lurk ahead. Shih said a fraction of 1 percent of Chinese owns two-thirds to twice the total amount of China's foreign reserves.
"Even if a share of this wealth was reallocated overseas, it would quickly deplete a sizable share of China's (then) $2.85 trillion exchange reserve" he said. "The more wealth held by the super-rich, the smaller share of their wealth they need to move overseas to cause a problematic drainage of the FX (foreign exchange) reserve."
Leaving China is exactly what the wealthy are doing.
Boston-based Bain & Co., where Republican presidential candidate Mitt Romney once served as CEO, reported last year that rich Chinese doubled their overseas investments and immigration to the United States was increasing 73 percent a year. More than half of the wealthy moved or considered moving their fortunes abroad.
Chinese railroad official Zhang Shuguang, for example, secreted $2.8 billion out of the country, according to Western media and Chinese state TV reports. He apparently surpassed his boss, who managed only $155 million.
Those trying to leave China include more than just the heads of industry and senior politicians. In April, Wang Guoqiang, the party secretary for a small city in Liaoning Province, left the country with $31 million in loot, according to the People's Daily, the Communist Party's newspaper. He reportedly joined his family in the United States.
© Copyright 2012, Trib Total Media
