China's capital exodus accelerated through 2015 as investors worried that policymakers would allow the yuan to weaken to cushion an ongoing slowdown in the $10 trillion-plus economy. The People's Bank of China has insisted it isn't contemplating a big change in currency policy and spent billions of the nation's foreign exchange reserves defending the yuan's value.
While China has strict rules on moving capital offshore, those seeking to evade limits can disguise money flows as payment for goods exported or imported to foreign countries or territories, especially Hong Kong. Economists have said they suspect China's December and January trade numbers were also skewed by this activity.
China has experienced massive outflows since August 2015.
"Data distortions from hidden capital flows remain a problem," Bloomberg Intelligence economists Tom Orlik and Fielding Chen wrote in a note, adding that the reported $880 million in imports from Hong Kong in January were "implausible."
Over-invoicing for goods gives a company or individual the opportunity to skirt China's capital controls and shift money offshore. As companies and savers shift money out of China, authorities have responded by clamping down on the myriad of illicit channels used, from curbing purchases of overseas insurance products to stopping friends and family members from pooling their $50,000-a-year quotas to get large sums of money out.
But China's capital borders remain porous. In particular, little attention appears to have been paid to companies misreporting imports and exports, according to research by Deutsche Bank. Economists at the German lender found that the practice has become a key way to skirt capital controls and accounted for $328 billion of the record outflows between August and January, or 78 percent of the decline in China's reserves.
"China has experienced massive capital outflows since August 2015," the Hong Kong-based Deutsche Bank economists, Zhiwei Zhang and Li Zeng, wrote in their Feb. 29 report.
An estimate by Bloomberg Intelligence put the total for 2015 at $1 trillion.
Over-reporting imports is likely the most important illicit channel, according to the Deutsche Bank research, which cited official banking statistics that recorded China paying $2.2 trillion for goods imported in 2015, while China Customs data only records $1.7 trillion of imports.
"The Chinese authorities have been trying to tighten control over capital outflows in recent months, but outflows through the import channel remained high in Jan. 2016, at $57 billion," the Deutsche Bank economists wrote.
Now that these outflow channels are revealed, they will likely be subject to more intensive scrutiny in coming months.
China has acknowledged a problem with fake invoicing in the past. In 2013, the government said export and import figures were overstated due to the phony trade in order to bring money into the mainland. Trade data since December suggests the practice had flared up again, this time to get money out.
Not all of the capital exodus can be dubbed capital flight. Chinese companies are buying foreign counterparts at a record pace. And a new analysis of some of the record volumes of cash that left China last year by the Bank for International Settlements concluded that much of it was likely due to companies paying off foreign debt and the shrinking of offshore yuan deposits.
China's capital outflows had "led to two different narratives," the BIS researchers said in their report Sunday. "One tells a story of investors selling mainland assets en masse; the other of Chinese firms paying down their dollar debt. Our analysis favors the second view, but also points to what both narratives miss -- the shrinkage of offshore renminbi deposits."
China's foreign-exchange reserves fell at a slower pace last month as the nation's financial markets stabilized. The world's largest currency hoard dropped by $28.6 billion to $3.2 trillion in February, the smallest decline since June and less than the $40.9 billion decrease expected by economists surveyed by Bloomberg.
China's yuan advanced in February against the dollar after three months of declines, and a stock market rout had eased, helped in part by a move by policy makers to reassure that they will prevent a hard landing.
Still, analysts warn that the uncertain outlook for the yuan means China's capital scare hasn't gone away. The biggest worry is if households accelerate the moving of their savings offshore, according to Zhu Haibin, JPMorgan Chase & Co.'s chief China economist.
"What we truly worry about is household behavior," said Zhu.
