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Why more Chinese tourists mean more capital flight

A rail journey Travel to Laos, see the Northern Lights in the far corners of Russia, or go on a polar cruise in the North Pole. These are some risky options for selling in China as the country reopens. The urge to travel seems strong: travel agency Ctrip reported that inquiries had quadrupled in a month; students were also looking for more opportunities to study abroad. In Macau, the gambling hub, two of the most luxurious hotels are fully booked this month. According to bank Natixis, China could spend $160 billion more on tourism this year if pre-pandemic patterns repeat.

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After three years of covid-19 restrictions, the wanderlust is understandable. But besides the obvious motives — sun, sea, sand and learning — there was another unstated motive: smuggling money out of the country. Capital controls limit the foreign currencies Chinese citizens can buy. The movement of people across borders provides cover for the flow of money. In 2017, for example, Chinese authorities reported how a Tianjin native held 39 bank cards and withdrew more than C$2.4 million (US$1.8 million) “in the name of studying abroad.”

In 2017, a paper published by Anna Wong, who was then with the US Federal Reserve Board, attempted to calculate how much money was leaving China through this route. She examined various sources for 20 popular destinations, including their balance of payments, visitor statistics and surveys of how much a typical Chinese tourist spends. This allows her to compare China’s reported outbound expenditures in its balance of payments with its mirror image: inbound expenditures reported by destination countries. In principle, the in and out measures should match. But starting in 2014, a huge gap has emerged between the two. $100 billion in 2015, accounting for 1% of China gross domestic product. Ms. Wong found that based on factors such as gross domestic product The number of destination countries, their distance from the mainland and the size of China’s own economy.

Since then, policymakers have tightened the country’s capital controls and scrutinized deals more closely. They also redacted past data to remove some illicit financial transactions from travel spending data. But a suspicious gap remains. China’s own tourism spending data still exceeds data from destination countries and global sources. In a report published on February 14, Natixis estimated the 2020 shortfall to be nearly $68 billion (roughly 0.5% of China’s gross domestic product), despite a drastic reduction in travel.

As China reopens, opportunities to circumvent capital controls will increase. The country’s currency is stable and growth looks likely to be robust this year, but Chinese households have accumulated large deposits during the pandemic. The real estate market, traditionally a favored destination for the country’s wealth, is still dying. Therefore, many will be keen to spread out their assets. Most people travel to broaden their horizons. The Chinese also like to expand their investment portfolios.

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