Hong Kong capital flight: determinants and features

Abstract

The frequent outbreak of financial crisis in recent years has triggered a new discussion of capital flight phenomenon in the fast growing emerging countries such as Thailand, India, and Malaysia. The capital flight phenomenon has captured many scholars’ attention and interests. Previous studies of capital flight phenomenon have focused on mainland China. However, Hong Kong is known as one of the dynamic financial centers in Asia and plays an important role in the development of the Chinese financial market. Most of the capitals from China use Hong Kong financial system as the channel to flee to other countries.

The objective of this study is to determine whether there is capital flight in Hong Kong. What determines the capital flight in Hong Kong financial market and whether there is a capital flight round-trip between Hong Kong and mainland China (from Hong Kong’s point of view). This study measures the capital flight in Hong Kong financial market using the direct and indirect capital flight measurements between 1998 and 2009 and the trade mis-invoicing method from 1970 to 2009. Ordinary least square method is used to analyze the determinants of capital flight in Hong Kong and to identify which factors have the most important impact on Hong Kong capital flight market. For the round-tripping capital flight between Hong Kong and mainland China, this study uses Xiao (2004) model to measure the round-tripping capital flight from Hong Kong financial market.

The result suggests that all three methods used in this study shows there is capital flight in Hong Kong. In addition, the determinants of Hong Kong capital flight are currency overvaluation, current account deficit and the dummy variable of China’s announcement of Open Door Policy in 1979. The round-tripping phenomenon between Hong Kong and China takes about one-third of China’s total recorded FDI from Hong Kong and more than half of Hong Kong reported FDI to China.