While China continues to attract much of the foreign capital that comes into Asia's emerging market economies, it appears these inflows are increasingly needed to offset capital flight. A flood of unregistered outflows from China has been compounded by the difficulty in tracking outbound movements of private capital and trade payments. At the same time, there is a massive amount of tax evasion and avoidance.
Individuals and enterprises are engaging illegal transfers, money laundering and the use of extralegal financial institutions to keep their assets out of the view of officialdom. An indication of the extent of capital leakage can be seen in the fact that exports have risen while growth in foreign currency reserves has slowed. Despite higher foreign income from net exports, foreign reserves are not increasing.
One way to gauge such leakage is to examine the entry for "errors and omissions" in the balance of payment accounts. This residual is calculated by subtracting foreign currency payments for imports, investment, debt service and additions to official reserves from receipts for exports, borrowings and investments by multinationals. The difference provides a ballpark figure for the value of capital flight.