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Christine Chan

China saw a sharp reduction in capital flight in the past two years, helped by an improved domestic environment and robust confidence in the mainland economy, according to Morgan Stanley.

Morgan Stanley economist Denise Yam Wing-yan believed that last year's capital flight reached US$5.9 billion - or 8.45 per cent of the country's total inflow of funds for the year.

The level represents a huge drop from 1998's US$54.6 billion and US$32.2 billion in 1999 when capital flight 'was significant'.

Ms Yam said the trend showed that more capital inflows were being kept within China's financial system, reflecting growing confidence among Chinese on the economy.

'This is a positive message about the mainland economy and the stability of the Chinese currency,' she said.

More money - which could otherwise be destined abroad - would be freed up towards, say domestic consumption, to help boost the mainland economy. That will also help relieve the pressure on the yuan.

Ms Yam defined 'capital flight' as the difference between the inflow of funds generated through goods and services and the outflow of funds ranging from changes in foreign reserves and other foreign assets held in the banking system.

In other words, the shortfall means the 'money was moved offshore' - similar to being 'lost' from the financial system.

She said the substantial moderation of capital flight over the past two years was due to reduced incentives to export capital amid a more stable domestic economic environment.

More effective controls on capital flight also helped slowed the exodus.

Beijing has been particularly concerned since the Asian financial crisis about the impact of illegal exodus of capital on the valuations and stability of its currency.

Ms Yam said a number of trends developed in China last year.

Foreign reserves increased by US$10.9 billion. Onshore foreign currency deposits rose US$25.1 billion. Foreign direct investment funds received but not yet utilised have probably been parked as foreign currency deposits at local banks.

Moreover, with the opening of the B-share market to local investors, individuals probably have more incentive to hold on to or raise their foreign currency deposits, reducing the demand for yuan assets.

In addition to taking on more foreign currency liabilities, the domestic banking system has accumulated foreign assets on behalf of the central bank.

The net foreign asset base of the domestic banking system surged by US$27.8 billion last year. This is similar to the accumulation of official foreign reserves, according to Ms Yam.

Meanwhile, Ms Yam said China's current account surplus this year rose to US$20.5 billion (or 1.9 per cent of its gross domestic product), beating her expectations.

The rise was primarily due to a narrowing in the services deficit and a reduction in the net factor incomes paid abroad.

Ms Yam also said both direct and portfolio investment balances for last year compared favourably with 1999.



Morgan Stanley data reflects stability of mainland currency