The Big Business of Fleecing the Chinese Regime

Over the past months, economists, investment experts, and the media have reported extensively about Chinese officials embezzling funds from the Chinese state and absconding with the funds to foreign countries. Such activities didn’t escape the Chinese regime, controlled by the Chinese Communist Party (CCP), especially as that regime is keeping the country under tight control.

“Officials appropriate houses for family members; divert business loans to their own accounts; declare bankruptcy rather [than] pay back loans; use government money to fix up their offices and homes,” according to a July 2011 entry about corruption in China on the Facts and Details website.

In August 2011, Xinhua, the Chinese regime’s mouthpiece, reported that China’s legislature was revisiting its Criminal Procedure Law, enacted in 1979 and amended once in 1996, to address confiscation of ill-gotten funds. A draft had been turned over to the National People’s Congress (NPC) Standing Committee for review.

“China’s legislature will revise its Criminal Procedure Law to allow the confiscation of illegally-obtained money from corrupt officials and terrorists who have fled the country,” the Xinhua announcement said.

A legal amendment, passed on March 14 by the Chinese regime’s 11th National People’s Congress, allows the confiscation of assets in cases of bribery or corruption, though it is unclear how the law will be applied in practice, according to a translation of the law on the Law Professor Blogs Network website.

The amendment included four new proceedings, including “cases involving the confiscation of illegally obtained incomes by suspects and defendants who have fled or died,” according to a law review on the JD Supra LLC website.

The law review suggests that prosecutors are being assigned a quota under which they are to achieve a certain amount of convictions of criminal defendants. Should the quota not be reached, the individual will receive a lowered performance rating.

The JD Supra review ends by suggesting that “it will take more than revising laws on paper to advance China’s system of criminal justice. Among other things, there is also an urgent need to reform the system that governs how legal rules are implemented.”

Capital Outflow Theory

“The detailed statistics from China’s April monetary statistics show that the change in the position of forex purchases has turned negative again in April. With a relatively large trade surplus in April, this indicates that capital flow turned hugely negative. … Excluding the trade surplus, capital outflow would be RMB177 billion [US$27.8 billion],” according to a recent article on the Macro Business website.

China’s regime continues to experience trade surpluses, with the April trade surplus amounting to $18.4 billion. Imports can’t keep up with exports, while foreign currency reserves are increasing at a much slower rate.

One measure of capital outflow or inflow is the easing or tightening of monetary conditions. When a central bank of a country increases the reserve ratio for financial institutions, it takes money out of the market, and when it decreases the ratio, it puts money into the market.

The People’s Bank of China reported that effective May 18, it would reduce the reserve ratio for financial institutions by 0.5 percent, after already implementing a 0.5 percent reduction in February. According to Xinhua, the February and May reductions would allow for US$62.9 billion to flow back into the economy with each reduction.

Generally, a capital outflow from any country would reduce the liquidity in the market. To counter the effect, a central bank may release money into the economy by reducing the reserve ratio requirement of a bank. This action tells banks that they need to release money back into the economy through lending activities.

“There is only one way to square a record trade surplus with the sharp fall in reserve growth. … Hot money is now flowing out of China,” according to a 2009 article on the naked capitalism website.

The article suggests that the Chinese regime’s trade surplus should have increased their foreign reserves. Foreign direct investments experienced by China should have put another few billion dollars into the Chinese regime’s reserve pockets.

The May reduction in financial institutions’ reserve ratio pumped even more money into the country. Yet, apparently, the Chinese state’s reserves didn’t increase as much as they should have.

“We now know, more or less, the reason for last weekend’s [May 2012] decision to reduce Reserve Requirement Ratio [RRR]. Indeed, while the 50bps [0.5 percent] cut of RRR would have made RMB421.14 billion [US$66.7 billion] available for banks to lend, almost half of that would have been offset by the April’s capital outflow,” according to Macro Business.

Macao as Port for Money Fleeing China

“A look behind the scenes at Macau [also called Macao] reveals a lot about Chinese corruption, and also about how scared many Chinese businessfolk [sic] are about the political climate back home,” according to The Economist, quoted in a January article on the Seeking Alpha website.

The article suggests that one can get a sense of the amount of illegal money leaving China by analyzing Macao gambling earnings.

Macao is the perfect place for a corrupt official to bypass the Chinese regime’s export controls on money. The official travels to Macao after buying the gambling chips beforehand. All the spoils are then paid out in Hong Kong dollars, which then can be deposited either in Hong Kong or a different foreign country, according to a quote from The Economist on the Seeking Alpha website.

“One rough way of monitoring the ‘unofficial’ money flow is to watch gaming revenues in Macau,” Seeking Alpha said.

Embezzling and Absconding Rampant

Chinese “anti-corruption officers are on heightened lookout for officials who implement a conniving and devious scheme to get their families abroad before they too flee with their ill-begotten gains already safely stashed in overseas banks. Their modus operandi involves cunning, timing and a good amount of luck,” according to a February 2012 report on The China Money Report website. The China Money Report is a publication by Tiger Hill, a Hong Kong-based asset management firm.

A mistakenly released report by the People’s Bank of China, the Chinese regime’s central bank, suggested that dishonest officials had clandestinely taken $124 billion of illegally obtained money out of the country between 1995 and 2008.

The China Money Report also said that from 16,000 to 18,000 public sector employees of various levels had taken flight according to a report from the Chinese Academy of Social Sciences. The report also referred to a Chinese anti-corruption expert who suggested that between 1995 and 2005, close to 1.2 million corrupt officials took flight.

It is not just officials who embezzle funds, the same can be found in the research environment. The China Decoder said that according to the China Association for Science and Technology, 60 percent of all research funds end up in the wrong hands.

“Much scientific research funding today goes to line the pockets of researchers,” the China Decoder article said.

Very few absconding officials are caught and brought to justice. Xinhua said that Chinese law is not favorable when trying to have a felon deported from a foreign country. For example, it took 12 years for fugitive Lai Changxing to be deported to China.

“It is common in China to hear of officials and wealthy individuals who transfer their money overseas by fair means or foul. At the end of March, Sun Feng, director of the Jiangsu branch of Agricultural Bank of China, was found to have illegally transferred 300 million yuan (US$79 million) to Canada before fleeing there with his five family members,” according to an article on the Want China Times website.

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