Studies Of Capital Flight In China

Capital is very important to the economic growth of one economy. Harrod-Domar Model suggests that, in G=S/K, because of the assumption that the input-output ratio K is invariable, the saving rate S which is also the rate of capital accumulation becomes the unique factor that decides the speed of economic development G. The Rostovian take-off model, one of the three prerequisites is to increase the net investment by 10 percent or more, which means capital accumulation has become the primary condition for economic growth.In the classical theory of international capital flows, due to the shortage of capital and foreign exchange in developing countries, and the lower rate of capital-output and labor-output, the marginal productivity of capital is higher, so that capital flows from developed countries to developing countries, and the level of global welfare is improved (MacDougall , 1969)Therefore, from the late 1970s, in order to develop our country, China has timely adopted a strategy which is to attract foreign investment, established Special Economic Zones and open coastal cities, and made a series of preferential measures to foreign-invested enterprises which even enjoy "ultra-national Treatment". The measures have made great success: China's economy maintained a high momentum of development, as well as played a very good role in promoting economic development of the world. According to statistics data of Chinese authority, from 1982 to 2005, the average rate of China's economic growth is about 10%. Until the end of February 2005, China has received the foreign investment fund with total amount of 570 billion U.S. dollars. In 2002, the mainland of China received foreign direct investment about 52.7 billion U.S. dollars, and became the world's largest country to attract foreign investment.However, in reality there is another problem in sharp contrast with this, that is when China tries her best to attract foreign investment, large-scale of capital flights out via various ways. From the sharp increase of the errors and omissions of the BOP account, we can see that from the absolute value, in the 24 years between 1982 and 2005, Chinese errors and omissions item of international balance becomes from the amount of 293 million U.S. dollars to 16.766 billion U.S. dollars, in 1995 which is as high as 17.81 billion U.S. dollars. From the relative value, Chinese errors and omissions item of the proportion of total trade is rising quickly, which let us think of the Latin America credit crisis from 1970s to 1980s and the financial crisis of Southeast Asia from 1997 to 1998.Capital flight is negative to economic growth, on the whole, it will reduce the social welfare and national utility in the debtor country.In recent years, as China has been faced with double surplus of recurrent items and capital projects, the capital market is more active, and a large number of international capital has entered China through various channels, which increases the base money from the central bank. Experience tells us that such a rapid and massive capital inflows are not sustainable; under certain conditions, a large number of international capital inflows inevitably bring a large amount of capital flight. Therefore, our country is faced with the risk of capital flight.Based on the analysis and summarization of the definitions of capital flight, this paper provides a new concept, that is private capital flows abroad abnormally for security or speculative consideration. Then we make a critical evaluation and comparison of estimation methods used in literatures. Then we modify and adjust the indirect estimation methods. Based on this, we analyses the determinants of capital flight with an econometric model. And the conclusion is that: the determinants of capital flight in China are the domestic inflation rate, the proportion of the budget deficit to the GDP, the overvaluation of the exchange rate, the differences of real interest rate between domestic and abroad and the proportion of foreign debt to the GDP. Finally, we analyses the channels of capital flight in China and give some Countermeasures for the cure of capital flight.