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China's super rich show doubt about country's economic future

Some 60 percent of China's wealthiest are thinking of leaving - and many have already put money away offshore.

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New importance to safe wealth

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Many of the rich Chinese investing abroad to win residence rights do so to ensure their childrens’ education at foreign universities, or their own retirement in comfortable security, the Bain report says. But they are also attaching new importance to making their wealth safe.

“They know that wealth accumulated in a disorderly environment” such as China’s rough-and-tumble economic reform and growth “can easily disappear in the same environment” commented Gu Jun, a Sociology professor at Shanghai University, in an online discussion of the Bain findings hosted by Eastmoney.com. “If order is predictable, wealth is safe.”

At the same time, China offers limited options for wealthy individuals seeking to place their money profitably: Real bank interest rates are negative – lower than inflation rates – the stock market is currently flat, and the real estate market explosion is widely seen as a bubble waiting to burst.

Those incentives to seek safer and more profitable investments abroad would be strengthened by any downturn in the Chinese economy, points out Professor Shih in a paper he delivered earlier this month to a conference in Bretton Woods, New Hampshire.

Shih estimates that the top 1 percent of China’s wealthiest households control assets equivalent to at least two thirds of China’s 3 trillion dollars in foreign exchange reserves. He warns that if they moved 30 to 40 percent of their wealth overseas they would deplete China’s reserves by 1 trillion dollars.

Danger zone

Multiple channels exist to circumvent Chinese exchange control mechanisms. The high concentration of wealth and negative interest rates at home combine to create extremely fragile conditions for China’s foreign exchange reserve, which is the backbone of the entire financial system of China, says Shih.

“Even if they [the wealthiest Chinese] reallocate a minority share of their wealth overseas,” he adds, “China’s foreign exchange reserve will deplete by a significant and dangerous degree.”

Capital outflows do not currently constitute anything like panicky capital flight, analysts point out. And the sharp rise in wealthy Chinese seeking havens for their money abroad “does not mean they are rushing for the doors,” says Michael Pettis, who teaches finance at Peking University.

“But it does suggest,” he adds, “that they are all making sure they know where the doors are.”

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