What is capital flight?

Asset flight is an act of withdrawing capital abroad for political reasons to avoid risks.

Generally, there are two situations:

One is the withdrawal of foreign capital from the host country,

First, domestic capital is evacuated from abroad.

The basic reasons for capital flight include:

(1) domestic anti-monopoly policy;

(2) Revolution, coup, civil strife and guerrilla activities occur in the country where the capital is located, and the situation is turbulent;

(3) There are signs that the host country will requisition, occupy or nationalize foreign capital.

(4) The illegal operation of the foreign-funded enterprise (such as bribery, market monopoly and political manipulation) has aroused the anger of the ruling and opposition parties in the host country and may be frozen or confiscated;

(5) The host country is prepared to implement new foreign investment laws or related laws, or change relevant laws and regulations, which will be unfavorable to foreign-funded enterprises.

Essential explanation

A situation in which domestic and foreign investors in a country or economy sell domestic financial assets and transfer their funds abroad on a large scale for fear of economic recession or other economic or political uncertainties in the country.

cause

Generally speaking, asset flight is mostly caused by economic reasons, but China's asset flight is mainly caused by a large number of corrupt officials fleeing with money through misappropriation, fraud and other means. Asset flight may have a negative impact on investors. Asset flight is generally accompanied by drastic changes (depreciation) in the exchange rate.

Some owners have doubts about the protection of private property rights; Corrupt elements and smuggling groups transfer funds. The economic system is not perfect and the management is weak. A country's political instability, the implementation of foreign exchange control or restrictions on investment applications: just as the asset market is an economic barometer, when assets flee, it is usually a precursor to economic recession. The large-scale asset flight event was the Asian financial crisis of 1997. After domestic and foreign funds fled from Asian countries, it took the region 2-3 years to get rid of the recession. As China also implements strict foreign exchange control under assets, it is unlikely that there will be a large-scale asset flight.

In China, asset flight refers to the unauthorized and illegal outflow of assets beyond the actual control of the government. Asset outflow cannot be regarded as asset flight. Most of the asset outflows are approved and compliant outflows. For example, approved debt service, foreign direct investment, deposit or release of assets of financial institutions to overseas peers, purchase of overseas securities, purchase of trade credit, etc. Even in the unauthorized illegal outflow, some of it is used for normal investment and business purposes. The reason for illegal outflow is mainly to avoid complicated approval procedures, or to reduce other transaction costs. Asset flight exists not only in developing countries, but also in developed countries. Asset flight is not only to evade foreign exchange control, but also to evade domestic political and economic risks, evade tax collection and management, or launder money and transfer assets.

Judging from the actual situation in China, the reasons for asset flight mainly include the following aspects:

Transfer illegal income

For example, funds obtained through corruption, bribery and rent-seeking, embezzled state-owned assets, and huge wealth seized by smuggling, bootlegging, fraud and tax evasion all constitute an important part of asset flight.

Realize turning public into private.

Because China is in the period of system transition, the incentive, restraint and internal supervision mechanisms of state-owned and collective enterprises are not perfect, domestic parent companies transfer assets and profits to overseas subsidiaries or overseas investors in various ways, so that a few people gain greater control over overseas public assets, or directly turn public assets into private assets. A considerable number of people have thus obtained the status of investment immigrants, bought real estate abroad and sent their children abroad.

Out of control

What is more prominent is to avoid investment management and foreign exchange management. Due to the strict examination and approval system for overseas investment in China, some enterprises or individuals transfer or intercept funds abroad without approval in an attempt to profit from investment.

seek advantages and avoid disadvantages

What is more prominent is that some domestic enterprises transfer foreign exchange funds abroad and then return to China as foreign capital to enjoy various preferential treatments such as taxes, which is also called "transitional" asset flight. At the same time, when there are spreads, exchange differences and income differences, in order to obtain high income, it will also lead to the outflow of illegal assets. In addition, when the market expects that the currency may depreciate, in order to avoid exchange rate risk, assets will flee. Delaying export collection and paying for foreign exchange in advance are common methods used by enterprises.

Transfer personal property

Fearing that private legal assets will be encroached, some private entrepreneurs take measures to withdraw their assets or buy foreign "green cards" and turn their assets to so-called "safe haven" countries. At the same time, because China still strictly controls assets, the property of immigrants can only be remitted from the income part, while the gold part cannot be transferred out, which will also lead to disguised flight.