Last year, Chinese customs officials nabbed a woman at the international airport with $250,000 strapped to her chest and thighs and hidden in her shoes. What made her carry such large sums of cash was her worry over the falling value of currency and a declining rate of return in her savings account due to frequent interest-rate cuts.

Unlike her, others indulging in this practice called “smurfing” are more cautious these days. They carry or transfer out only $50,000 at a time — the annual legal limit in China. This way, many wealthy families are trying to move huge sums of money out of the country by asking their relatives, cousins and even friends to carry $50,000 apiece. The  outflow from such practices runs into the millions.

With growth already weak, such capital flight puts pressure on China’s yuan, slowing its economy and upsetting global markets. It’s estimated that since 2015, companies and individuals have moved nearly $1 trillion from China.

As money pours out, Beijing is using its big cash reserves to protect its currency and applying curbs on the country’s links to the global financial system.

One way to halt capital flight is to make the country more attractive to both Chinese and foreign investors. China knows it’s not the fulcrum of the world economy and that the yuan is as vulnerable as any other leading currency.

The first step in attracting capital is to decontrol interest rates and stop lending to heavily indebted state enterprises and local governments. This will inevitably upset some powerful people. The party must also loosen its grip on the economy.

Foreign critics never tire of finding fault with China’s efforts to limit capital flight. But Beijing is doing its best. It has restricted the withdrawal of yuan from overseas branches of Chinese banks. In Shenzhen, residents have to make reservations up to a week if they want to change the daily maximum of $10,000 worth of Chinese currency into dollars.

Insurers, who were earlier given permission to invest 15% of their assets overseas, have now been told to suspend many of their overseas investment plans.

Small steps. But they help in a big way in slowing an outward torrent of money.

Leave a comment

Your email address will not be published. Required fields are marked *