I thought the following blog entry from Forbes was excellent.  It just goes to show that the Laffer Curve concept is international in terms of its effects.  Could we see a second brain/wealth drain as these entrepreneurial leaders in China move to country’s like the U.S. with greater freedoms?  




China’s rich, primarily driven by a sense of insecurity, are taking money out of their country.  Many are actually preparing to move elsewhere.

According to a new study, almost 60% of China’s “high net worth individuals,” defined as those possessing more than 10 million yuan in investable assets, are either considering emigration through investment programs or are completing the emigration process.  The survey, conducted by China Merchants Bank and Bain & Co., also reports that 27% of those with more than 100 million yuan in investable assets have already emigrated and 47% of them are thinking about leaving the Motherland.

The stunning results correspond to reports that the U.S. Treasury unit monitoring illegal money flows has, since the beginning of last summer, detected a surge in hidden cash transfers out of China.

Almost all of the funds supporting emigration applications were spirited out of China in violation of Beijing’s strict rules.  The country leads the world in illicit fund transfers, according to Global Financial Integrity, a nonprofit.  The estimated total of China’s outbound flows from 2000 to 2008 was a staggering $2.18 trillion.

The flood of “hot money” leaving China picked up in the last quarter of 2008.  That was when the Chinese central government announced its stimulus plan, which initiated a new phase in the partial renationalization of the economy.  Then, Premier Wen Jiabao started pouring state cash into the state sector and state financial institutions began diverting credit to state-sponsored infrastructure.  As a result of the stimulus program, about 95% of China’s growth in 2009 was attributable to investment, and almost all of the investment had come from the state.  The percentage for 2010 will not be too far off of that.

Beijing’s plan, however, was good for private entrepreneurs who, although shut out of many portions of the economy by state enterprises, rode the resulting asset bubbles to even greater wealth.  The number of the country’s high net worth individuals according to the China Merchants-Bain study will reach 585,000 this year, almost double the figure for 2008.

The emigration of China’s wealthy has, not surprisingly, triggered controversy.  “We have been working hard to develop the economy in the past 30 years, but now these elite members of society are fleeing with the majority of the wealth,” said economic analyst Zhong Dajun to the Global Times, the Communist Party-run newspaper.  “The loss may be even higher than all the foreign investment we have attracted.  It is as if, when the time of harvest comes, we find the fruits have all gone to others’ baskets.”  Zhong should not be shocked.  Beijing, since 2008, has been targeting private entrepreneurs and abusing them even more than usual, so it is natural they are now trying to protect themselves from a rapacious state.

And the situation is bound to get even worse if Xi Jinping becomes the next Party general secretary at the end of next year, as just about everyone expects.  Xi will undoubtedly bring his fellow “princelings” into positions of political power.

The princelings, descendents of former leaders of the People’s Republic, will surely use their new political clout to consolidate their grip on the economy.  This means, among other things, that others, especially owners of private domestic enterprises, will have even fewer opportunities than they do today.

“We can only hope the rich people stay out of patriotism,” says Xia Xueluan of Peking University.  Patriotism, these days, may be the only thing keeping Chinese entrepreneurs in China.

And, from the look of things, it is not enough.  The country’s wealthy are going on shopping tours for U.S. real estate and, if they have not done so already, are moving their families abroad.  There has, in the last five years, been a 73% increase in Chinese investment immigrants to the United States.  Countries, like Canada, are raising their minimum investment requirements for investment-immigrant candidates due to the sheer size of the tide of Chinese cash.

Chinese cash is largely responsible for the third wave of buying from Asia into Vancouver.  In an “unprecedented” surge of business for brokerages in that city in February, Chinese buyers
snapped up homes, townhouses, and condominiums as sales skyrocketed 70% over the preceding month.

As foreigners pour into China, China’s entrepreneurs are taking their money out.  Which group do you think knows more about what is going on?