Necessity is the mother of invention. Most adults today have never dealt with foreign exchange controls. Yet they were relatively common all the way to the 1960s. The remnants of a mercantile world. China has retained control over its currency to this day. For Chinese people, they have to request permission to purchase foreign currency. Even State-owned enterprises need to do this...
Chinese private companies that thrived in the 1990s and the early 2000s faced the problem of slow approval to obtain the right to purchase foreign currency to buy the necessary supplies they needed, and so many were forced to build foreign currency reserves abroad. At first, it was innocent, it really was to simplify their lives, mostly a timing issue. So Chinese manufacturers would create intermediaries in Europe or America. They would buy supplies from these intermediaries, at a slightly increased price. Instead of buying a chemical from the market for 8 dollars a kilo, they would buy it from their subsidiary for 9 dollars a kilo, when they sold, they would sell to a North American or European intermediary at a slightly lower price, than what the real end buyer would pay. The vast majority did it only for one side of the transaction.
Foreigners don't understand the Chinese taxation system, it can be rather discriminatory, and few had any problems with taking all the profits away, the CCP matra was that "profits" were stolen either from the consumer or from the workers. Therefore, Chinese manufacturers had little interest in having profits in the country. This trend accelerated in the early 2010s.
Over the years, the profits retained in Europe and North America had to be paid to the owners of the business, so a very important fund management business emerged around 2007 or 2008 to invest these surpluses.
After the pandemic, many small manufacturing companies in China were "acquired" by ex-military or ex-civil servants. the exodus of ex-owners accelerated. I was recently told by an ex-fund manager, that of his nearly 400 Chinese clients that were China residents in 2020, nearly 350 were now residents elsewhere. Their stories are different but they rhyme; Civil Servants or members of the armed forces made them an offer they could not refuse.
Out of curiosity I contacted a few friends in the business on both sides of the Atlantic, the message was the same, the vast majority of Chinese clients had left China. The funny bit comes from "my" ex-China clients. One told me that he retained the supply businesses in Europe so he continues to make money selling goods to his old firms.
In terms of proportion, we are talking a few thousand people here at most. Medium-size import/export businesses only. How does this change China? In my estimation not at all, however, the new owners have no experience in running companies, and the ex-owners had for years kept the profits offshore, it's hard to imagine that this state of affairs will have a happy ending. Eventually, the money runs out! the new owners either get government loans or shut down. Rumors are government loans...
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