Illicit capital outflows in the trillions, fake foreign investment and real estate speculation fueled by corruption and money laundering have driven the Chinese economy to the brink of collapse, experts say.
Since its economic reforms in the late 1970’s, China has relied heavily on foreign investment to pump up its GDP. But today, massive capital that has been drained out of China through illicit outflows is often invested back into China, masquerading as foreign direct investment (FDI). At the same time, corrupt officials and businesses, which stole the money, enjoy the benefits and incentives the Chinese regime offers to attract foreign capital. This “round-trip money” typically lands in speculative real estate development, where returns are fast and high.
The Chinese economy hemorrhaged US$3.79 trillion in illicit financial outflows from 2000 through 2011, according to an October 2012 Global Financial Integrity report.
The Economic Observer, a Chinese publication, quoted an internal report from the Central Commission of Discipline Inspection, which said that $1 trillion was illegally moved out of China in 2012 alone, an increase from $600 billion in 2011 and $412 billion in 2010. This official report forecasted that the figure could grow to a breathtaking $1.5 trillion in 2013.
The Global Financial Integrity report linked the massive illicit outflows to “round-tripped” FDI, saying it harms the economy because such investments “typically do not generate much employment or transfer significant technical know-how that increases the economy’s productive capacity.”
Such round-tripped FDI has been in existence since 2004, according to Cheng Xiaonong an economist and former advisor to the late Zhao Ziyang, who was head of the Chinese Communist Party from 1987 to 1989.
Cheng’s investigation of all foreign investments between 1991 and 2008 led to an alarming finding: since 2007, about 70 percent of China’s recorded FDI originated from tax havens or off-shore financial centers like the Bahamas, the Cayman Islands and Mauritius.
Only about 30 percent of FDI in 2008 was genuine foreign capital and the remaining 70 percent was fake, Cheng told Radio France International. He calculated that the percentage of fake FDI has risen to between 80 and 90 percent in 2012.
The bulk of this round trip investment money originates from shell companies, which are registered by corrupt Chinese officials in off-shore tax havens. These hollow companies then transfer the laundered money back into China as FDI. That’s why China’s foreign exchange reserves remained high despite the massive illicit outflows, Cheng explained.
Dr. Frank Xie, who teaches business at the University of South Carolina, Aiken, recently said in an interview with New Tang Dynasty Television that round-tripped FDI exploits the Chinese economy in multiple ways.
First, the round-tripped FDI enjoys tax and land transfer benefits. Second, if an investment produces earnings, those earnings will be transferred back overseas to the tax haven. Third, if goods are manufactured for exports, the investor can take advantage of export tax rebate policies, Xie said.
Addressing the influence of round-tripped FDI on the Chinese economy, Xie agreed that this phony foreign investment also falsely increases China’s GDP, while the impact on the economy is actually deceptively damaging rather than beneficial.
Cheng concurred, saying that this influence distorts China’s entire economic structure, since round-tripped FDI mainly flows to real estate speculation. It tends to inflate the housing bubble and to create deceptive short-term growth in construction-dependent industries like steel, he said. In his opinion, many Chinese people and industries work diligently, but their efforts primarily end up helping corrupt officials amass real estate.
Addressing additional concerns regarding the inflated housing market, Cheng said that corrupt officials have invested in far more housing than they can ever use or resell by taking advantage of borrowed money schemes and speculative real estate ventures. Additionally, they benefit from tax credits whether the property sells or not. That’s another reason why China now has tens of millions of sold but unused investment homes, turning the market into a housing bubble that is a potential bomb, in Cheng’s viewpoint.
Cheng warned that once the housing bubble bursts, the impact will be wide and deep as corrupt officials’ real estate loans are funded with Chinese people’s bank deposits. When that happens, tens of trillions of dollars of Chinese people’s savings will go down the drain, and China will be facing an economic crisis ten times more serious than those in Japan and the United States, he predicted.