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A nation must think before it acts.
Over the last decade, an estimated $3.8 trillion in capital has left China. Net foreign direct investment over the same period of time has amounted to $1.3 trillion, leaving the country with a net loss.
To reduce capital flight, the Chinese government as developed a complex system of capital controls. But these actions haven’t stemmed the losses because they’re based upon three myths that distort our understanding of the causes and possible cures of Chinese capital flight.
Myth #1: expected depreciation of the yuan
The first myth is that the major driver of recent capital flight is the expectation of yuan depreciation. Based on this assumption, Chinese portfolio holders seek to convert yuan into dollars or other currencies in order to profit from the expected depreciation.
However, between 2005 and 2014 there was an almost 25% appreciation of the yuan to 6.14 yuan per dollar and yet capital flight accelerated from $125 billion in 2005 to $484 billion in 2014.