Figure 1 breaks down capital flows into whether Chinese or foreign capital is leaving. Initially, both groups were moving capital out of China, but more recently we observe only Chinese capital flight. This is worrisome. There is only so much foreign capital that can leave and Chinese FX reserves are sufficient to pay off foreign debt. But FX reserves would be rapidly exhausted if every Chinese mom and pop wanted to move their money abroad.
Figure 2 shows the composition of Chinese capital leaving the country. A large part is due to errors and omissions, meaning that the authorities don’t know why and how this capital is leaving. This does not bode well for their ability to crack down on these outflows. There was also a jump in other non-portfolio outflows, mostly by banks and corporates which tend to be less prone to panic than households.
Figure 3 illustrates how corporates move capital abroad without breaching capital controls. The share of export proceeds converted into RMB has fallen from 63% to 49%, suggesting that exporters keep a larger share of proceeds abroad. The drop in the conversion rate is equivalent to $300bn or one third of the reserve loss over 2015-16.
With Chinese capital flight posing a bigger danger to financial stability than foreign capital flight, capital controls are likely to remain confined to the former. Also, the authorities might instruct state-owned enterprises to convert their export proceeds into RMB or, in extremis, introduce a repatriation requirement for all export enterprises. For the politically sensitive year of 2017 at least, such measures should succeed in taming the horses.