China Loses Trillions in Dirty "MONEY"

Posted by Brianna Panzica - Friday, October 26th, 2012

China is expected to experience a drop in growth this year as it feels the tremors running through the global economy.

Manufacturing is slow, exports are sluggish, and demand from abroad just isn't picking up.

But it may be another, quieter issue that's also leading to a lower GDP for the Asian nation.

A new report by Global Financial Integrity shows that over the last ten years, China has lost $3.79 trillion in money smuggling.

This includes money lost in corruption, crime, or tax evasion – and it creates a constant outflow from the country that continues to grow.

In 2000, for example, $204.7 billion in dirty money flowed out of the country. Over a decade later, in 2011, this had more than doubled to $472 billion – 8.3 percent of the nation's GDP.

Often it occurs through trade mispricing. Traders will record inflated prices, shaving funds off the top. According to the report, this action was highest in the trade of nuclear reactors, boilers, machinery, and electrical equipment.

From Reuters:

“The magnitude of illicit money flowing out of China is astonishing,” said GFI director Raymond Baker. “There is no other developing or emerging country that comes even close to suffering as much in illicit financial flows.”

And it's true – even though other nations experience this sort of crime, China has always topped the list.

In 2009, dirty money accounted for $903 billion in losses globally. Ranking in the top four with China were Mexico, Russia, and Saudi Arabia.

But it's not just traders scraping money off the top. Corruption at higher levels – political levels – has also been an issue, raising suspicion of a number of China's top leaders.

On Thursday, the New York Times released an article detailing an investigation into the life and riches of prime minister Wen Jiabao and his family.

According to the article, members of his family controlled $2.7 billion in assets.

His brother's company received $30 million in contracts and subsidies for wastewater treatment after the SARS outbreak called for better disposal of medical waste.

And a number of family members and friends held substantial stakes in Ping An before it went public. But prime minister Wen enabled the company's public offering by exempting it and several other companies from certain rules.

His wife, Zhang Beili, also saw even greater success in her diamond business once her husband gained political power.

Of course, the Chinese government wasn't too happy about the publication of this investigation, quickly blocking web access to the English-language and Chinese-language versions of the New York Times.

It isn't the first time China has done this, and the nation is well-known for its media censorship. But the New York Times has had fewer issues with the nation after the former President Jiang Zemin ended blocking of the site in 2001.

This isn't necessarily the same as the type of outsourcing causing huge losses in the economy. But it's a similar sort of corruption.

Money smuggling and hidden deals are getting even bigger and moving up to the top ranks of the government. And the government is trying to hide the information from its citizens.

So what does this mean for a nation that's losing over 8 percent of its GDP to illegal transactions?

All we can guess is that it's not likely to slow down soon.