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China's high-speed rail was originally expected to find up to half its money from private sources, but didn't. The same is to be expected from Beijing's latest investment push. Photo: Reuters

There is nothing sluggish about mainland investment at the moment. The pace of investment is going very strongly. There is only one problem. It is going abroad.

In the first quarter alone, the net outflow of capital amounted to US$159 billion, the equivalent of a thumping 7 per cent of gross domestic product. For the year to March it came to US$380 billion.  Nothing like it has ever been seen before.

The National Bureau of Statistics has not got around to revealing this startling statistic yet. It has published the figures for the current account and the overall balance of payments up to the first quarter but has yet to fill in the first quarter blanks under the heading Financial Account.

No matter. The difference between the current account and the overall balance is the net movement of capital, in or out. Some of it is called errors and omissions but it is all capital and it is streaming out ever more strongly.

In fact, I suspect the net capital outflow over the last year has been even greater than US$380 billion. I think a good portion of what is labelled as services outflow under the current account is people taking their money out on the fiction of buying services abroad but actually doing nothing of the kind. I cannot prove this, however, so we shall just let the figure be what it purports to be.

The ramifications of it have already shown up elsewhere in the economy. One obvious trend that has recently emerged is a sudden decline in import growth while export growth is still holding up reasonably well, certainly better than elsewhere in Asia, given present slow market conditions.

The implication here is that industry overall is destocking to build up money to send abroad or, just as likely, is cutting back on domestic investment. Either way the result is likely to be slower output growth and slower exports within a year if the trend persists.

It all suggests that this 1.97 trillion yuan worth of unnamed projects that Beijing wants started up to keep economic growth above 7 per cent will have to look to Beijing itself for the money, either directly or through a state directive that the banking sector provide the money.

There will be nothing new. The big high-speed railway system was originally expected to find up to half its money from private sources and willing investment by the banks. In the end the banks had to be told to do it and no other money came in at all. We can confidently expect the same result in this latest Beijing investment push.

But it does surprise me that anyone should think this a good reason to push up the Shanghai stock market when the capital flow figures suggest that money flowing to Shanghai hardly even touches the sides on its way further out.

This article appeared in the South China Morning Post print edition as: Chinese capital headed in one direction: abroad
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