22
Workshop version – please contact the author before citing. Paper prepared for ‘Deconstructing Offshore Finance: From state of the art towards a research agenda’ Interdisciplinary Seminar – Smith School of Enterprise and Environment and St Peter’s College Oxford University 2 – 3 September 2013 Ȁ Abstract The question considered here involves the increasing role, and potential increasing influence, of capital from China in the circuits of offshore finance. The process establishing the ‘workshop of the world’ at the same time transferred wealth to party cadre and wellͲconnected entrepreneurs. In some instances, individuals accumulated significant wealth and now utilise financial facilities already familiar to the wealthy citizens of other countries for managing and maintaining that wealth ‘offshore’. The accumulation of private Chinese capital is situated in this analysis as a ‘postmodern’ finance capital with echoes of early 20 th century imperialism. The nature of the capital involved is considered through reports that attempt to measure the scale of Chinese capital flight and the Chinese private wealth that is increasingly relocated to the offshore realm. The challenge before China is twoͲfold, on the one hand there appears to be limited enforcement capacity for existing legislation (though the penalties include capital punishment), and on the other hand China’s absence from international forums producing global financial governance (e.g. OECD) limits opportunities to incorporate its concerns in the production of that governance. The challenge before us is to incorporate China in current international efforts to address corporate tax avoidance and tax havens. William Vlcek Lecturer in International Relations School of International Relations University of St Andrews St Andrews, Fife KY16 9AX Scotland, United Kingdom EͲmail: wbv2@stͲandrews.ac.uk

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Page 1: capital across the... · This contribution represents a move to theorise ... in Africa to the already existing Asian colonies ... the colonial powers and their colonies and grounded

Workshop�version�–�please�contact�the�author�before�citing.�

Paper prepared for

‘Deconstructing Offshore Finance: From state of the art towards a research agenda’

Interdisciplinary Seminar – Smith School of Enterprise and Environment and St Peter’s College

Oxford University

2 – 3 September 2013

���������������������������������Ȁ�����������������

Abstract�

The�question�considered�here�involves�the�increasing�role,�and�potential�increasing�influence,�of�capital�from�China�in�the�circuits�of�offshore�finance.��The�process�establishing�the�‘workshop�of�the�world’�at�the�same�time�transferred�wealth�to�party�cadre�and�wellͲconnected�entrepreneurs.��In�some�instances,�individuals�accumulated�significant�wealth�and�now�utilise�financial�facilities�already�familiar�to�the�wealthy�citizens�of�other�countries�for�managing�and�maintaining�that�wealth�‘offshore’.��The�accumulation�of�private�Chinese�capital�is�situated�in�this�analysis�as�a�‘postmodern’�finance�capital�with�echoes�of�early�20th�century�imperialism.��The�nature�of�the�capital�involved�is�considered�through�reports�that�attempt�to�measure�the�scale�of�Chinese�capital�flight�and�the�Chinese�private�wealth�that�is�increasingly�relocated�to�the�offshore�realm.��The�challenge�before�China�is�twoͲfold,�on�the�one�hand�there�appears�to�be�limited�enforcement�capacity�for�existing�legislation�(though�the�penalties�include�capital�punishment),�and�on�the�other�hand�China’s�absence�from�international�forums�producing�global�financial�governance�(e.g.�OECD)�limits�opportunities�to�incorporate�its�concerns�in�the�production�of�that�governance.��The�challenge�before�us�is�to�incorporate�China�in�current�international�efforts�to�address�corporate�tax�avoidance�and�tax�havens.�

��

William�Vlcek�Lecturer�in�International�Relations�School�of�International�Relations�University�of�St�Andrews�St�Andrews,�Fife�KY16�9AX�Scotland,�United�Kingdom�EͲmail:�wbv2@stͲandrews.ac.uk�

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Introduction�

A�headline�in�the�Wall�Street�Journal,�on�2�January�2013�was�‘Chinese�Fly�Cash�West,�by�the�

Suitcase’�(MacDonald,�Vieira,�and�Connors�2013).��This�article�was�one�of�a�number�of�pieces�

published�in�the�Wall�Street�Journal�over�the�preceding�year�under�a�topic�heading�of�‘China’s�Money�

Trail’�and�highlights�the�development�of�a�growing�source�for�private�capital�in�the�world�economy.��

Consequently,�a�need�to�recognise�and�understand�the�rise�of�China�in�the�world�economy�equally�

involves�the�rise�of�Chinese�capital�in�the�offshore�dimension.��The�approach�undertaken�in�the�

following�consideration�on�the�topic�of�‘deconstructing�the�offshore’�concerns�that�increasing�role,�

along�with�increasing�influence,�of�capital�from�China�in�the�circuits�of�offshore�finance.��And�with�

renewed�efforts�to�produce�global�governance�for�this�problem�domain,�it�is�useful�to�consider�

whether�those�initiatives�(by�the�G8�and�OECD)��may�have�any�significant�effect�without�the�

participation�of�China.��Beyond�the�growth�in�private�capital�held�by�Chinese�citizens,�there�is�the�

fact�as�well�that�much�of�the�literature�on�offshore�finance/tax�havens/secrecy�jurisdictions�

possesses�a�Western/developed�world�bias.1���These�structures�are�identified�to�exist�predominantly�

in�relation�to�the�major�developed�state�financial�centres�in�the�form�of�archipelagos�of�small�

jurisdictions�with�close�financial�relations�to�one�or�more�major�financial�centre.2���

According�to�one�history�the�origins�for�tax�havens�rest�in�the�use�of�Switzerland�by�French�

nobles�before�the�Revolution�to�evade�onerous�royal�taxation,�while�from�another�history�they�

emerge�from�the�growth�of�the�Eurodollar�market�as�a�consequence�of�the�postͲWorld�War�II�

settlement�establishing�the�Bretton�Woods�institutions�(Faith�1982;�Schenk�1998).��Most�

international�initiatives�over�the�past�two�decades�to�address�the�tax,�legal�and�regulatory�arbitrage�

facilitated�by�offshore�finance�is�similarly�driven�by�the�developed�states�(G7)�and�their�multilateral�

agents�for�economic�monitoring�and�control,�the�Organisation�for�Economic�Cooperation�and�

Development�(OECD)�and�the�Financial�Action�Task�Force�(FATF).3��Nonetheless,�the�features�of�an�

offshore�regime,�as�a�product�of�the�inside/outside�nature�produced�by�state�sovereignty,�are�not�

specific�to�the�20th�and�21st�centuries�nor�are�they�something�particularly�unique�to�modern�

capitalism�(Walker�1993).��John�M.�Hobson,�for�example,�identified�a�similar�feature�in�trade�with�

China�in�the�15th�and�16th�centuries,�where�in�order�to�circumvent�the�‘soͲcalled�“imperial�ban”�in�

1434’�on�foreign�trade,�ships�were�‘reflagged’�by�carrying�Portuguese�shipping�papers.��In�other�

words,�in�order�for�Chinese�traders�to�go�out�and�engage�in�foreign�trade�they�sailed�with�shipping�

documents�identifying�them�as�trading�under�a��‘Portuguese’�flag,�which�in�effect�established�

Portugal�as�the�forefather�of�the�modern�‘flags�of�convenience’�shipping�registries�provided�by�

Liberia,�Marshall�Islands,�Panama,�and�Vanuatu�(Hobson�2004,�64,�151�Ͳ�152).��Thus�when�rules�or�

regulations�exist�that�are�felt�to�be�an�unnecessary�or�unwarranted�hindrance�to�business�

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transactions,�firms�and�their�representatives�will�seek�ways�to�get�around�them,�for�the�most�part�

legitimately.4�

Thus,�the�structures�of�the�offshore,�understood�as�the�use�and�manipulation�of�a�jurisdiction’s�

sovereign�duties�and�responsibilities�to�govern�a�territory,�provide�the�means�to�arbitrage�the�rules,�

regulations�and�laws�of�another�jurisdiction�(cf.�Palan�2003).��This�is�not�a�practice�limited�to�those�

small,�island�jurisdictions�frequently�identified�as�being�‘offshore’,�and�as�I�have�argued�elsewhere�

the�use�of�another�jurisdiction’s�sovereignty�in�this�fashion�serves�to�create�a�mask�behind�which�one�

may�arbitrage�not�only�taxation,�but�also�regulatory�requirements,�interest�rates�and�national�

identity�(Vlcek�2009,�1477).��Consequently,�with�respect�to�these�issues�of�sovereignty,�tax�regimes,�

and�tax�avoidance�it�is�important�to�look�at�the�state�of�affairs�beyond�those�‘usual�suspects’,�that�is�

to�consider�the�sovereign�practices�other�than�those�of�Caribbean�and�Pacific�islands�or�small�

European�states�and�the�feudal�relics�that�dot�Europe�(e.g.�Andorra,�Guernsey,�Isle�of�Man,�Jersey,�

and�Lichtenstein).��In�particular,�any�analysis�must�include�the�United�States�as�representing�the�

largest�tax�haven�in�the�world�(for�the�nonͲresident,�nonͲcitizen)�in�conjunction�with�its�deployment�

of�structural�power�to�pursue�its�taxͲevading�citizens�as�demonstrated�by�recent�aggressive�action�

against�Swiss�banks�as�well�as�the�Foreign�Account�Tax�Compliance�Act�(FATCA),�which�serves�to�

conscript�foreign�banks�in�the�income�reporting�processes�of�the�US�Internal�Revenue�Service�

(Simonian�2011;�Toh�2013).���

This�contribution�represents�a�move�to�theorise�the�capital�that�utilises�the�offshore,�and�to�

situate�these�forms�of�accumulation�today�as�more�a�product�of�globalisation�than�the�tax�havens�

themselves�(Palan,�Murphy,�and�Chavagneux�2010).��This�capital,�more�so�than�its�owner(s),�is�

nomadic;�freed�from�the�constraints�of�capital�controls�(in�most�territories)�it�readily�and�rapidly�

transforms�itself�in�a�neverͲending�pursuit�of�profit�(Coates�and�Rafferty�2007).��In�other�words,�the�

concern�expressed�by�John�A.�Hobson�with�regards�to�the�role�of�capital�in�the�production�of�

European�imperialism�at�the�beginning�of�the�20th�century�persists,�though�in�a�new�guise.5��The�

problem�with�capital�allocation�and�productive�use�may�be�less�nationalistic�at�the�beginning�of�the�

21st�century�(though�certainly�this�claim�may�be�debated),�but�it�is�no�less�global�or�pernicious.��One�

point�of�difference�involves�the�seeming�‘nomadic’�nature�of�capital�in�its�pursuit�of�a�better/higher�

rate�of�return�on�investment,�where�risk�too�may�be�mediated�by�the�location�of�an�offshore�vehicle�

in�the�chain�of�investment.��At�the�same�time,�these�structures�and�practices�remain�dependent�on�

the�operation�of�sovereign�states�(as�regulators�and�enforcers)�in�the�global�political�economy�while�

the�primary�purpose�may�be�to�avoid�the�rapacious�and�confiscatory�nature�of�the�state�itself.��

Hence�the�nomad�continues�to�require�the�services�of�the�sedentary�(state),�if�only�as�a�place�of�

respite�and�relaxation�graced�by�the�accoutrements�available�when�suitable�payment�is�offered�

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(Vlcek�2009).���And�while�capital�controls�continue�to�exist�for�China,�their�operational�effectiveness�

is�limited,�as�indicated�in�the�opening�sentence�to�this�paper.��Globalisation�today�offers�more�

avenues�(or�at�least�more�effective�avenues)�than�existed�fifty�years�ago.���

The�structure�for�the�following�discussion�begins�with�the�next�section�setting�some�terminology�

before�identifying�the�force�of�capital�behind�early�20th�century�imperialism�(John�A.�Hobson)�and�its�

early�21st�century�form�of�accumulation�(David�Harvey).��Substance�for�this�framework�is�then�

provided�with�a�consideration�of�capital�flight�and�measuring�the�wealth�accumulated�by�Chinese�

citizens�over�the�past�three�decades�that�is�using�the�offshore�as�one�avenue�for�flight.��The�final�

section�assesses�the�possibility�for�regulation�(global�governance)�of�the�offshore�in�light�of�this�

significant�and�increasing�presence�of�Chinese�wealth�in�the�world�economy.�

The�hidden�imperialism�of�postmodern�capital�

Before�outlining�the�nature�of�‘imperialism’�present�in�the�capital�that�flows�through�the�

offshore�financial�centre�(OFC)�the�adjective�‘postmodern’�as�used�in�the�context�of�this�paper�needs�

to�be�explained.��Within�the�international�relations�discipline�postmodern�has�been�described�as�

‘one�of�the�most�influential�and�controversial�theoretical�developments�in�the�study�of�international�

relations.’���(Devetak�2001,�181)��Crucially,�postmodernism�makes�a�critical�confrontation�with�the�

nature�of�the�sovereign�state,�recognising�that�it�is�not�‘natural’�and�that�state�boundaries�represent�

the�‘product�of�histories�of�struggle�between�competing�authorities�over�the�power�to�organize,�

occupy,�and�administer�space’�(Devetak�2001,�193,�citing�Gearóid�Ó�Tuathail�(1996)�Critical�

Geopolitics,�p.�1).��Under�international�norms�of�nonͲintervention�in�the�domestic�politics�of�the�

sovereign�state,�the�state�is�free�to�craft�its�legal�system�for�its�own�ends�and�hence�the�state�is�at�

liberty�to�craft�laws�that�constitute�and�reproduce�the�offshore�as�a�space�beyond�and�outside�the�

jurisdictional�constraints�operating�within�the�boundaries�of�other�state�entities.��The�national�

identity�of�capital�is�transformed�by�its�transitory�passage�through�an�offshore�space�and�in�the�

absence�of�a�firm�connection�to�the�onshore�state�it�circulates�in�a�global�financial�system�through�

and�among�states�to�be�reconstituted�as�nomadic�capital�(Vlcek�2009,�1468�Ͳ�1471).��As�Zygmunt�

Bauman�so�elegantly�described�the�situation,��

In�its�heavy�stage,�capital�was�as�much�fixed�to�the�ground�as�were�the�labourers�it�engaged.��

Nowadays�capital�travels�light�Ͳ�with�cabin�baggage�only,�which�includes�no�more�than�a�

briefcase,�a�cellular�telephone�and�a�portable�computer.��It�can�stopͲover�almost�anywhere,�

and�nowhere�needs�to�stay�longer�than�the�satisfaction�lasts.�(Bauman�2000,�58)6�

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Striding�over�the�national�borders�of�sovereign�states�nomadic�capital�is�postmodern�in�its�disregard�

for�onshore�constraints�through�its�use�of�offshore�intermediation.��At�the�same�time�nomadic�

capital�today,�through�its�constant�pursuit�of�ever�greater�profits,�echoes�the�imperialist�capital�of�

the�past.�

The�aggressive�expansion�of�European�capitalism�in�the�late�19th�century,�typified�by�the�soͲ

called�‘Scramble�for�Africa’�added�European�colonies�in�Africa�to�the�already�existing�Asian�colonies�

and�the�subjugation�of�China;�and�this�latter�point�continues�to�haunt�Chinese�foreign�policy�today.��

From�this�international�environment�of�metropolitan�countries�(the�European�colonial�powers)�and�

their�relationship�with�colonies�in�Latin�America,�Africa�and�Asia�emerged�theories�of�imperialism�by�

John�A.�Hobson�and�Vladimir�Lenin.��These�theories�focused�on�the�nature�of�the�economic�

relationship�between�the�colonial�powers�and�their�colonies�and�grounded�it�in�the�need�for�the�

capitalist�producers�in�the�metropolitan�states�to�find�outlets�for�their�surplus�capital�(in�order�to�

make�further�profits)�and�new�markets�for�their�surplus�goods�(in�order�to�maintain�the�levels�of�

production�by�their�factories).��In�the�Preface�to�the�first�edition�of�Imperialism:�The�Last�Stage�of�

Capitalism�Lenin�writes,�‘In�the�conditions�in�which�I�was�obliged�to�work�there�[in�Zurich�in�1916]�I�

naturally�suffered�somewhat�from�a�shortage�of�French�and�English�literature�and�from�a�serious�

dearth�of�Russian�literature.��However,�I�made�use�of�the�principal�English�work�on�imperialism,�the�

book�by�J.�A.�Hobson,�with�all�the�care�that,�in�my�opinion,�that�work�deserves.’��And�while�Lenin’s�

analysis�of�imperialism�may�be�better�known�to�International�Relations�scholars�today,�Hobson’s�

book�has�influenced�a�number�of�other�authors�in�addition�to�Lenin,�for�example,�Hannah�Arendt�

(1958).7���For�the�purposes�of�this�analysis�it�is�Hobson’s�identification�of�finance�capital�as�a�

motivating�force�behind�(in�particular�British)�imperialism�that�is�relevant.�

John�A.�Hobson’s�book,�simply�titled�Imperialism:�a�study,�was�first�published�in�1902,�and�for�

him�the�driving�force�behind�imperialism�was�the�pursuit�of�new�markets�for�domestic�

manufacturing�and�investment.��As�production�and�competition�for�the�domestic�market�increased�

profit�margins�declined,�therefore�a�new�market�for�excess�production�was�required.��‘The�power�of�

production�has�far�outstripped�the�actual�rate�of�consumption,�and,�contrary�to�the�older�economic�

theory,�has�been�unable�to�force�a�corresponding�increase�of�consumption�by�lowering�prices.’�

(Hobson�1902,�¶�I.VI.7)��This�economic�problem�found�a�political�solution�with�foreign�expansion,�but�

rather�than�compete�with�foreign�companies�in�that�new�market�the�solution�was�imperialism�and�

establishing�a�colony,�which�created�a�captive�market�for�the�imperial�country’s�manufactures�and�

investors�while�keeping�out�foreign�competitors.��It�is�in�one�sense�a�solution�to�capitalism’s�

tendency�toward�‘boom�and�bust’�cycles,�an�attempt�to�avoid�the�bust�by�pushing�the�boom�phase�

outward�from�one�national�economy�into�the�world.8�

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In�Hobson’s�view�late�19th�century�Europe�not�only�had�an�‘overͲaccumulation’�of�manufacturing�

capacity�and�goods,�but�more�critically�it�had�an�overaccumulation�of�capital.����The�owners�of�capital�

were�continually�looking�for�ways�to�increase�their�profits�(return�on�investment),�which�the�

domestic�European�markets�were�looking�less�and�less�capable�of�providing.��One�outlet�was�a�wave�

of�British�investment�in�railroads,�in�the�United�States�and�South�America�as�those�economies�grew�

in�the�late�19th�century�(Friedlander�1995,�64�Ͳ�65).��But�there�were�limits�to�those�investment�

possibilities,�including�the�fact�that�host�state�governments�grew�concerned�over�the�high�levels�of�

foreign�investment.��Hobson�wrote�that�as�‘it�becomes�more�difficult�for�its�manufacturers,�

merchants,�and�financiers�to�dispose�profitably�of�their�economic�resources,�and�they�are�tempted�

more�and�more�to�use�their�Governments�in�order�to�secure�for�their�particular�use�some�distant�

undeveloped�country�by�annexation�and�protection.’��(Hobson�1902,�¶�I.VI.16)�9����We�should�not�

overemphasise�the�suggestion�that�Hobson’s�analysis�posits�finance�capital�as�the�guiding�influence�

behind�government�action�(c.f.�Sutton�2013,�222).��Nor�should�we�think�that�the�role�of�finance�

power�behind�the�imperialist�tendencies�of�governments�declined�with�the�decline�of�colonial�

possessions�in�the�latter�half�of�the�20th�century.�

One�possible�path�toward�understanding�the�latter�point�may�be�found�in�David�Harvey’s�The�

New�Imperialism�and�its�examination�of�overaccumulation.���Harvey�used��this�concept,�which�is�a�

theoretical�extension�to�Karl�Marx’s�original�proposition�for�primitive�accumulation�in�the�

development�of�capitalism,�as�the�means�to�theorise�‘new�imperialism’�(Harvey�2005,�2003).��The�

initial�position,�as�described�by�Harvey,�is�that�primitive�accumulation�for�Marx�consisted�of�a�variety�

of�processes,�including�the�commodification�of�land�and�labour�power,�the�direct�appropriation�of�

natural�resources�through�colonialism/imperialism,�and�state�control�over�financial�exchange�

through�national�money,�taxation�and�credit�(Harvey�2003,�74).��This�process�is�essentially�the�

privatisation�of�goods�and�services,�mediated�through�the�circulation�of�money,�that�in�turn�

facilitated�the�accumulation�of�wealth�as�property�or�money�for�persons�(natural�and�legal)�as�well�

as�the�state�(achieved�through�measures�of�taxation).��Subsequent�to�Marx,�the�emergence�of�

financialisation�and�the�growth�and�power�of�finance�capital�were�incorporated�as�part�of�the�

process�for�primitive�accumulation�by�Vladimir�Lenin,�Rudolf�Hilferding,�and�Rosa�Luxemburg,�among�

others�(Harvey�2003,�74).��Of�continuing�relevance�today�is�Harvey’s�observation�that�these�three�

authors�all�remarked�on�the�‘predation,�fraud�and�thievery’�accomplished�through�financialisation,�

including�Ponzi�schemes�(e.g.�Bernard�Madoff),�corporate�fraud�(e.g.�Enron)�and�the�‘dispossession�

of�assets�(the�raiding�of�pension�funds�and�their�decimation�by�stock�and�corporate�collapse)’,�

activities�notoriously�more�prominent�in�the�years�since�Harvey�made�this�observation�and�they�are�

listed�among�the�causes�and�consequences�of�the�global�financial�crisis�(Harvey�2003,�74�Ͳ�75).��His�

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point,�however,�was�that�the�position�designating�these�processes�of�‘accumulation�based�upon�

predation,�fraud�and�violence�to�an�“original�stage”�that�is�no�longer�relevant’�for�the�practices�of�

capitalism�was�inaccurate,�while�at�the�same�time�it�seemed�inappropriate�to�name�a�process�that�

continued�to�function�in�the�same�manner�today�as�‘primitive’�(Harvey�2003,�74).��It�is�for�this�reason�

he�terms�the�process�‘accumulation�by�dispossession’.�

The�means�by�which�this�process�operates�is�simply�stated,�‘what�accumulation�by�dispossession�

does�is�to�release�a�set�of�assets�(including�labour�power)�at�very�low�(and�in�some�instances�zero)�

cost.’�(Harvey�2005,�149)��Harvey�describes�accumulation�by�dispossession�as�a�solution�to�the�

problem�of�‘overaccumulation’,�that�is,�an�economic�condition�in�which�‘surpluses�of�capital�(perhaps�

accompanied�by�surpluses�of�labour)�lie�idle�with�no�profitable�outlets�in�sight.’�(Harvey�2005,�149)10��

Consequently,�the�surplus�capital�seeks�out�and�identifies�the�low�cost�asset�and�acquires�it�in�order�

to�secure�the�future�profit�(return�on�investment)�that�it�is�believed�to�represent�and�possess.��The�

classical�example�of�primitive�accumulation�was�the�privatisation�of�a�formerly�public�(common)�

asset,�for�example,�land.��In�the�present�context�Harvey�finds�this�practice�in�the�acquisition�of�assets�

from�‘distressed’�property�owners�following�an�economic�crisis,�in�his�example�Southeast�Asia�

following�the�1997�–�98�crisis,�while�more�recently�there�have�been�references�to�hedge�funds�

circling�around�the�EuroͲzone�in�order�to�pounce�on�assets�sold�by�financial�firms�at�a�loss�because�of�

their�need�to�increase�their�capital�buffer�(Harvey�2005,�151;�Wigglesworth�2011).11��In�the�following�

analysis,�the�overaccumulation�for�this�case�emerges�from�the�transition�of�China�to�a�socialist�

market�economy�producing�substantial�wealth�in�private�hands.��But,�beyond�investing�that�capital�in�

domestic�property,�stocks,�bonds�and�wealth�management�products�the�wealthy�Chinese�citizen�also�

pursues�foreign�investment�opportunities,�in�part�to�avoid�confiscation�by�the�state,�as�discussed�

further�below.�

Asiatic�flight�capital�

While�this�private�capital�may�cross�state�borders�to�avoid�confiscation�as�much�as�seek�out�

higher�returns�in�foreign�lands,�the�motivations�for�these�capital�movements�are�diverse.��

Historically,�capital�flight�may�not�have�been�recognised�as�a�factor�in�international�capital�flows�at�

the�beginning�of�the�20th�century,�nonetheless,�capital�flight�is�a�significant�component�in�capital�

flows�today,�particularly�from�developing�economies.��At�the�same�time�confiscation�by�the�state�is�a�

leading�contender�for�motivating�capital�flight,�whether�through�excessive�taxation�or�outright�

confiscation�(hence�the�imposition�of�capital�controls�in�Cyprus�as�part�of�the�package�to�rescue�its�

banks�in�2013).��In�its�production�for�an�estimate�on�capital�flight�out�of�China,�the�activist�NGO,�

Global�Financial�Integrity,�used�the�definition��‘Illicit�financial�flows�or�illegal�capital�flight�involve�

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money�that�is�illegally�earned,�transferred,�or�utilized.’�(Kar�and�Freitas�2012,�1)��This�perspective�

may�be�juxtaposed�with�that�approach�used�in�the�wideͲranging�academic�analysis�conducted�under�

the�guidance�of�Gerald�Epstein�at�the�University�of�Massachusetts,�Amherst�in�2005.�For�that�project�

capital�flight�was�defined�as�‘the�transfer�of�assets�abroad�in�order�to�reduce�loss�of�principal,�loss�of�

return,�or�loss�of�control�over�one’s�financial�wealth�due�to�governmentͲsanctioned�activities.’�

(Epstein�2005,�3)��This�broad�definition�is�open�to�legal�flows�in�addition�to�the�illegal�and�

consequently�recognises�that�structures�of�the�state�(the�presence�of�capital�controls)�may�influence�

the�choice�of�means�utilised�to�accomplish�that�transfer�of�assets.�

By�contrast�Charles�Kindleberger�considered�the�motivation�for�the�transfer�of�assets�

independent�of�the�means�and�suggested�that�capital�flight�in�fact�represented�a�form�of�‘middle�

class�strike’.��That�is,�capital�flight�represented�the�efforts�of�citizens�to�demonstrate�their�opposition��

to�the�actions,�or�inaction,�of�the�government�to�address�its�concerns�and�interests,�as�opposed�to�

the�concerns�and�interests�of�striking�labour�(Kindleberger�1987,�58).��In�other�words,�concessions�to�

the�labour�movement�may�be�expected�to�lead�to�an�increase�in�wealth�redistribution�via�taxation,�

and�these�citizens�are�not�prepared�to�contribute�to�that�process.��Kindleberger�offered�examples�

from�1960s�Europe,�however,�this�logic�is�similar�to�the�argument�made�by�Charles�Tiebout,�except�

rather�than�a�case�where�the�taxpayer�relocates�because�of�opposition�to�local�tax�policy�with�capital�

flight�the�taxpayer�has�relocated�their�taxable�assets�(Tiebout�1956).���Yet�another�perspective�is�

demonstrated�by�capital�flight�out�of�Latin�America,�where�wealthy�citizens�are�confronted�by�an�

environment�in�which�kidnapping�is�a�major�industry�and�it�is�safer�for�one’s�family�to�conceal�the�

extent�of�one’s�wealth�by�sending�it�abroad�(A.C.�2013).��All�of�these�motivations�may�be�found�for�

the�case�of�capital�flight�out�of�China�in�recent�years.�

Measuring�China’s�capital�flight�

The�story�behind�the�nature�of�capital�flight�out�of�China�is�far�more�complex�than�described�in�

Kar�and�Freitas�(2012).��Firstly,�this�capital�is�illicit�outside�of�China�in�that�it�must�first�circumvent�

China’s�capital�controls,�a�position�that�does�not�speak�to�its�licit�nature,�or�not,�within�China.��The�

limit�of�money�that�the�individual�Chinese�citizen�is�permitted�to�transfer�outside�of�China�is�

US$50,000�per�annum�(Yu�2008).��In�2012�Macau�SAR�reported�a�total�of�16,902,499�visitors�from�

the�Mainland�(out�of�a�total�visitor�count�of�28,082,292)�and�gross�gaming�revenue�of�more�than�

US$38�billion�from�its�casino�sector.��The�average�contribution�to�gaming�revenue�per�visitor�would�

be�US$1,359,�however,�the�point�emphasised�in�discussions�of�the�Macau�casino�industry�is�the�

heavy�reliance�on�the�VIP�Room,�catering�to�the�high�roller�(Gough�2011,�2012).��And�reports�on�the�

introduction�of�Chinese�VIP�Rooms�in�Las�Vegas�casinos�speak�of�players�dropping�between�

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Page�|�9��

US$10,000�and�US$400,000�per�hand�of�baccarat.��To�gamble�at�the�VIP�level�clearly�involves�having�

access�to�capital�outside�of�China�in�excess�of�the�nominal�annual�limit�imposed�by�government�

capital�controls�(Berzon,�O'Keeffe,�and�Grimaldi�2012).��Secondly,�there�is�a�presumption�that�the�

misͲpricing�of�exports�from�China�is�solely�about�moving�capital�illicitly.��An�investigation�of�the�

business�practices�used�by�traders�operating�in�a�transnational�informal�economy�reveals�that�some�

measure�of�Chinese�exports�is�mispriced�for�other�reasons.��In�particular,�shipments�assigned�a�low�

reported�value�in�order�to�avoid�onerous�customs�duties�and�import�tariffs�in�the�destination�

country�(Neuwith�2011,�73).��Thirdly,�the�case�for�roundͲtripping�provided�in�Kar�and�Freitas�(2012)�is�

rather�limited,�suggesting�the�flows�from�the�tax�havens�are�offset�by�‘illicit�(and�licit)�funds�by�

Chinese�HNWIs�[high�net�worth�individuals]�and�private�corporations�in�those�jurisdictions.’�(p.�10)��A�

fuller�analysis�on�roundͲtripping�and�the�location�of�the�Caribbean�jurisdictions�in�capital�flows�to�

China�is�provided�elsewhere�(Vlcek�forthcoming)�and�an�analysis�on�the�outbound�direct�investment�

strategies�used�by�Chinese�firms�is�offered�by�(Sutherland�and�Ning�2011).��One�rationale�for�using�a�

corporate�vehicle�registered�in�an�offshore�financial�centre�is�to�benefit�from�the�institutional�

features�they�provide�in�order�to�reduce�transaction�costs�for�investing�in�China�(Sharman�2012b).��

One�specific�institutional�feature,�the�Eastern�Caribbean�Commercial�Court,�is�the�subject�of�an�

ethnographic�study�interrogating�the�function�of�OFCͲregistered�subsidiaries�for�Chinese�firms�

(Maurer�and�Martin�2012).��In�sum,�Kar�and�Freitas�(2012)�provide�a�gross�figure�for�the�extent�of�

capital�not�recorded�by�the�official�statistics�of�China�with�a�limited�explanation�for�the�motivations�

that�lie�behind�these�capital�flows,�offering�income�inequality�and�roundͲtripping�for�money�

laundering�purposes�as�rationales.12�

Measuring�China’s�private�wealth�

Alternative�efforts�to�understand�the�extent�of�unrecorded�wealth�in�China�includes�a�study�

sponsored�in�part�by�Crédit�Suisse.��In�‘Analysing�Chinese�Grey�Income’,�Professor�Wang�Xiaolu�of�the�

China�Reform�Foundation�analysed�data�collected�from�a�survey�administered�across�19�provinces,�

14�counties�and�64�cities�in�China�with�a�total�of�4909�samples.��One�objective�for�the�survey�was�to�

overcome�the�problem�of�underreporting�income�in�the�government’s�household�survey�when�that�

income,�for�example,�previously�had�not�been�reported�to�local�tax�authorities.��Comparing�the�

survey�results�with�the�official�household�income�data�found�there�to�be�an�average�difference�

across�all�income�groups�of�90�per�cent.��As�an�average�this�figure�is�the�product�of�the�fact�that�at�

low�income�levels�there�was�little�difference�between�the�two�sets�of�data�while�at�the�top�income�

decile�the�difference�was�significantly�greater�than�90�per�cent�(Chan�et�al.�2010,�3).13��The�status�of�

this�‘grey�income’�is�that�while�undeclared�it�is�was�not�treated�as�automatically�illegal,�when�there�

may�be�no�law�‘to�define�its�legitimacy.’���The�study�identified�a�number�of�sources�for�grey�income�

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that�emerge�from�the�politicalͲeconomic�and�cultural�features�of�China�today,�including�large�cash�

gifts�to�the�relatives�and�children�of�Party�officials�(‘We�believe�these�are,�in�effect,�bribes.’)�and�staff�

bonuses�to�employees�of�government�institutions�and�stateͲowned�enterprises�‘far�above�normal�

market�practices,�sometimes�even�avoiding�taxes.’��Further,�the�use�of�privileged�information,�insider�

knowledge,�can�produce�‘windfall�profits�in�financial�[and�property]�markets’�(Chan�et�al.�2010,�31).��

The�investigation�of�the�phenomenon�of�grey�income,�based�as�it�is�on�survey�data,�only�highlights�

the�nature�of�the�problem�as�officially�unreported�income�with�the�implication�that�income�

inequality�in�China�is�far�greater�than�perceived.��It�does�not,�however,�help�to�determine�either�the�

scale�or�size�of�the�problem�and�the�extent�to�which�this�undeclared�Chinese�private�wealth�may�be�

located�outside�of�China.�

One�effort�to�measure�global�wealth�represented�via�the�medium�of�high�net�worth�individuals�

(HNWIs)�is�the�annual�production�of�a�‘World�Wealth�Report’�by�the�consultancy�Capgemini�and�RBC�

Wealth�Management.��The�report�for�2013�found�that�the�total�number�of�HNWIs�and�their�wealth�

reach�a�new�record�level�in�2012�as�a�result�of�increased�wealth�in�North�America�and�the�AsiaͲ

Pacific.14��The�total�sum�of�wealth�was�listed�as�US$46.2�trillion,�which�is�greater�than�the�US$�40.7�

trillion�measured�in�2007;�clearly�the�wealthy�as�a�collective�have�not�experienced�the�longͲterm�

negative�effects�of�the�global�financial�crisis�seen�elsewhere�in�the�economy.��China�was�ranked�

fourth�in�the�listing�for�the�top�twelve�states�(after�the�US,�Japan�and�Germany)�with�643�HNWIs�in�

2012,�an�increase�of�14.3�per�cent�on�the�number�for�2011�(Capgemini�and�RBC�Wealth�

Management�2013,�6).��This�report�is�the�product�of�a�‘Capgemini�Lorenz�curve�methodology’�using�

official�data�from�sources�that�include�the�International�Monetary�Fund�and�the�World�Bank,�in�

addition�to�a�survey�of�‘more�than�4400�HNWIs�across�21�major�wealth�markets’�(Capgemini�and�RBC�

Wealth�Management�2013,�42).��Consequently,�while�the�authors�state�that�‘offshore�investments�

are�theoretically�accounted�for’�(when�such�data�is�included�in�national�statistics)�and�also�that�they�

‘account�for�undeclared�savings’,�it�cannot�be�expected�that�‘grey�income’�is�adequately�accounted�

for�by�their�model�(Capgemini�and�RBC�Wealth�Management�2013,�42).�

Yet�another�analysis�of�global�wealth�produced�by�the�Boston�Consulting�Group�put�global�

private�wealth�at�US$135.5�trillion,�a�more�inclusive�figure�beyond�simply�HNWIs�(but�again�

excluding�primary�residences,�luxury�goods�and�‘investors’�own�businesses’)�for�2012�(Beardsley�et�

al.�2013,�4).��Similarly,�China�was�ranked�third�(after�the�US�and�Japan)�on�the�list�of�states�with�the�

most�millionaires�and�with�a�prediction�that�China�will�pass�Japan�on�this�list�for�2013�(Beardsley�et�

al.�2013,�6).��As�with�the�Capgemini/RBC�Wealth�Management�study,�the�target�audience�for�the�

Boston�Consulting�Group�report�is�the�wealth�management�business�sector,�those�firms�providing�

specialist�banking�and�investment�management�services�to�the�wealthy.��The�Boston�Consulting�

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Group�study�also�includes�a�brief�discussion�of�the�offshore�and�the�impact�of�international�

regulations�and�OECD�member�state�pursuit�of�increased�tax�revenue�from�undeclared�offshore�

assets.��It�predicts�that�over�the�subsequent�five�years�growth�in�offshore�wealth�would�emerge�from�

the�AsiaͲPacific,�Latin�America�and�the�Middle�East�and�Africa�regions;�in�other�words�from�

developing�economies�rather�than�the�OECD�economies�(Beardsley�et�al.�2013,�12).��An�earlier�

Boston�Consulting�Group�report�prepared�in�cooperation�with�CCB�Private�Bank�assessed�‘Wealth�

Markets�in�China’�(Leung�et�al.�2011).15��Analysis�for�this�report�used�market�research�data�from�

China�Construction�Bank�and�the�Boston�Consulting�Group�and�official�Chinese�government�

statistics,�and�as�such�is�likely�to�miss�significant�grey�income.��Nonetheless,�it�identified�1,030,00�

high�net�worth�households�in�China�at�the�end�of�2010�holding�RMB�42�trillion�in�investable�assets�

(US$�6.8�trillion),�representing�a�28.6�per�cent�increase�in�assets�held�from�2009�(Leung�et�al.�2011,�

12).��And�the�interesting�point�about�the�offshore�emerging�from�the�survey�of�HNWIs�referenced�in�

this�report�is�that�‘most�HNW�individuals�in�China�are�less�concerned�about�taxes�and�more�

concerned�about�safety�and�stability’�as�compared�to�HNWIs�in�Europe�and�North�America�(Leung�et�

al.�2011,�31).�

Capturing�domestic�capital�

The�news�article�on�Chinese�private�capital�seeking�investment�opportunities�in�Canada�that�

opened�this�paper�is�but�one�of�a�number�of�similar�reports�that�appeared�in�the�media�over�the�past�

few�years�beyond�those�items�reporting�on�the�Chinese�grey�income�study.��A�New�York�Times�article�

discussed�the�increasing�presence�of�Chinese�purchasers�in�the�London�real�estate�market.��The�

article�highlighted�the�point�that�capital�controls�imposed�by�the�Chinese�government�hold�limited�

impact�as�‘many�wealthy�Chinese�elude�the�restrictions’�(Werdigier�and�Wassener�2010).��The�fact�

the�many�of�these�transactions�are�completed�with�cash�should�raise�a�concern�over�money�

laundering,�a�point�that�was�not�raised�by�this�news�report.��The�presence�of�Chinese�buyers�of�

French�vineyards�on�the�other�hand�did�raise�the�money�laundering�fear�for�French�antiͲmoney�

laundering�officials.��Because�these�transactions�involved�‘complex�judicial�arrangements�with�

holding�companies�located�in�fiscally�privileged�countries’�it�was�difficult�for�these�officials�to�

determine�beneficial�ownership�of�the�property�and�thus�the�legality�of�the�capital�used.��At�the�

same�time,�one�expert�quoted�in�the�news�article�suggested�there�was�little�pressure�to�pursue�any�

investigation�for�money�laundering�‘because�these�funds�were�badly�needed�in�France’s�current�

economic�situation.’�(Boehler�2013)��However,�it�should�also�be�noted�that�this�particular�issue�

merely�occupied�one�‘Focus’�box�in��the�125�page�long�review�of�TRACFIN’s�activities�during�2012�

(TRACFIN�2013,�27).�

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AntiͲmoney�laundering�legislation,�investigation�and�enforcement�represents�a�tool�that�may�be�

deployed�to�combat�corruption�and�bribery�as�much�as�it�is�used�against�illegal�drugs�trafficking�

(Sharman�and�Chaikin�2009;�Chaikin�and�Sharman�2009).��The�difficulty�for�doing�so�in�the�case�of�

China�may�be�observed�in�the�nature�of�private�capital�in�China�and�capital�flight�out�of�China�

because�of�an�embedded�principal/agent�problem.��Specifically,�the�state�(as�a�bureaucratic�entity)�is�

the�‘principal’�and�it�is�very�much�attempting�to�restrain�these�capital�outflows,�while�the�agents�

(government�officials�and�party�cadres)�individually�and�personally�seek�to�shift�the�capital�they�

personally�have�accumulated�beyond�the�borders�of�China�and�hence�the�reach�of�the�state.��This�

problem�was�documented�in�a�report�prepared�by�the�antiͲmoney�laundering�monitoring�and�

analysis�centre�for�the�People’s�Bank�of�China,�a�report�that�was�meant�for�internal�distribution�only.���

But�the�high�quality�of�the�report�was�recognised�with�a�joint�first�prize�for�outstanding�financial�

research�by�the�China�Society�of�Finance�and�Banking,�leading�to�its�public�display�on�a�People’s�Bank�

of�China�website�for�a�short�period�of�time�(People's�Bank�of�China�2008).��‘As�many�as�18,000�

corrupt�mainland�officials�may�have�fled�the�country�with�as�much�as�800�billion�yuan�in�illͲgotten�

gains�in�less�than�two�decades�[midͲ1990s�to�2008]’�(Clem�2011).��As�noted�in�a�Telegraph�article�on�

this�report,�China�does�not�have�extradition�treaties�with�many�Western�states,�which�may�be�due�to�

its�‘heavy�use�of�the�death�penalty’�as�well�its�‘poor�record�on�the�use�of�torture�in�prisons’�(Foster�

2011).�

It�is�understandable�that�those�individual�with�illicitlyͲaccumulated�wealth�would�flee�with�it�to�

other�states�to�avoid�prosecution�and�punishment�(Fang�and�Zhang�2011).��Even�holders�of�

legitimate�wealth�are�justified�in�a�concern�over�government�expropriation�via�new�wealth�taxes.��

Research�in�developing�economies�has�found�that�tax�collections�and�enforcement�are�focused�on�

large�taxpayers�(mostly�firms�in�the�formal�economy�because�it�is�easier�to�identify�their�taxable�

assets�and�to�collect�those�taxes)�and�on�the�political�opponents�of�the�current�regime�in�power.��

Thus�the�tax�collector�is�viewed�not�as�a�civil�servant�collecting�revenue�for�public�goods�and�the�

general�welfare�of�society,�but�rather�as�an�enforcer�of�government�repression�operating�on�behalf�

of�the�ruling�elite.���The�use�of�the�tax�administration�in�this�manner�in�Russia�has�been�noted�in�the�

media,�but�is�equally�prevalent�in�smaller�developing�economies�(Weaver�and�Clover�2013;�

Bräutigaum,�Fjeldstad,�and�Moore�2008).��At�the�same�time�the�preferential�treatment�of�large�

taxpayers�by�the�UK�government�has�been�criticised�in�the�press�and�by�tax�campaigners�in�the�UK�

(Houlder�and�Murphy�2011;�Hawkes�and�Wearden�2011).��Meanwhile�the�wealthy�individual,�from�

China�and�elsewhere�is�encouraged�to�emigrate�by�special�visa�programmes�designed�to�attract�that�

private�capital;�in�the�US,�for�example,�there�is�a�special�category�of�visa�(EBͲ5)�targeting�individuals�

that�invest�at�least�US$500,000�in�a�commercial�enterprise�leading�to�the�creation�or�preservation�of�

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at�least�10�fullͲtime�jobs�for�US�citizens�(Roberts�and�Zhao�2011;�and�see�www.uscis.gov).��

Collectively�these�conflicting�signals�toward�wealthy�individuals�mirror�state�practices�with�business�

firms,�aggressive�pursuit�of�corporate�tax�avoidance�schemes�alongside�special�tax�regimes�intended�

to�attract�investment�and�job�creation.��Add�in�the�intermediation�role�performed�by�offshore�

financial�centres,�those�‘complex�judicial�arrangements’�identified�by�TRACFIN,�and�the�result�is�the�

creation�of�a�barrier�facilitated�by�the�onshore/offshore�sovereignty�divide.�

Regulating�across�an�onshore/offshore�divide�

The�individual�pursuit�by�states�of�uncollected�taxes�on�the�undeclared�foreign�income�of�their�

citizens�was�expanded�internationally�in�1998�when�the�OECD�published�its�report�on�Harmful�Tax�

Competition�following�earlier�direction�by�the�G7�member�states�to�investigate�the�impact�of�

globalisation�and�tax�havens�on�their�ability�to�collect�income�taxes�(Vlcek�2008,�51�Ͳ�52).��Progress�

by�the�OECD�in�its�effort�to�lead�a�multilateral�initiative�against�tax�havens�and�their�use�by�

individuals�was�hindered�by�the�withdrawal�of�US�support�in�2001.��A�change�of�administration�in�the�

US�had�resulted�in�a�shift�of�official�government�policy�against�the�OECD�initiative�(Vlcek�2008,�81�Ͳ�

84).��Official�US�policy�shifted�once�again�following�the�global�financial�crisis�and�the�entry�of�yet�

another�new�administration�to�the�White�House�in�2009.��The�US�government�is�now�pursuing�direct�

action�against�foreign�financial�institutions�to�give�the�US�government�the�account�details�for�all�

accounts�held�by�US�citizens.��The�Foreign�Account�Tax�Compliance�Act�(FATCA)�requires�foreign�

financial�firms�to�provide�account�data�to�the�Internal�Revenue�Service�(IRS)�and�the�penalty�for�

failing�to�comply�is�a�30�percent�withholding�tax�on�the�proceeds�(interest,�dividends�or�sale)�from�

any�assets�owned�by�the�firm�in�the�US�(see�http://www.irs.gov/Businesses/Corporations/ForeignͲ

AccountͲTaxͲComplianceͲActͲ(FATCA)).��This�legislation�is�implemented�in�parallel�to�a�US�

government�campaign�specifically�against�the�Swiss�banking�industry�(and�Swiss�banking�secrecy�law)�

to�force�Swiss�firms�to�review�details�on�any�accounts�held�by�a�US�citizen�(Letzing�2013).�

With�the�G20�elevated�from�a�finance�ministers�talking�shop�to�the�forum�for�global�economic�

governance�following�the�global�financial�crisis�it�emerged�as�the�venue�for�proposals�to�counter�

banking�secrecy�and�the�tax�havens�(G20�2009,�4).��Yet�it�failed�to�achieve�the�objective�of�the�

several�states�on�this�issue�due�to�Chinese�resistance�over�the�inclusion�of�Hong�Kong�and�Macau�in�

the�initial�‘tax�haven�blacklist’.��In�fact,�news�articles�at�the�time�of�the�April�2009�G20�summit�in�

London�suggest�that��in�addition�to�the�inclusion�of�these�two�Special�Administrative�Regions,�the�

role�of�the�OECD�in�the�process�was�a�problem�because�China�is�not�a�member�of�that�organisation�

(Fidler�and�Batson�2009;�Robbins�2009).��It�was�only�through�the�mediating�intervention�of�the�US�

President�that�a�compromise�between�the�French�and�Chinese�positions�was�achieved�for�the�G20�

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final�communiqué�to�‘note’�that�the�OECD�had�on�that�same�date�published�a�list�of�tax�havens�

(Agence�France�Presse�2009).��In�that�initial�OECD�list,�‘A�Progress�Report�on�the�Jurisdictions�

Surveyed�by�the�OECD�Global�Forum�in�Implementing�the�Internationally�Agreed�Tax�Standard’,�the�

identification�of�China�as�‘substantially�implementing’�the�agreed�standard�included�a�footnote�

stating��it�excluded�‘the�Special�Administrative�Regions,�which�have�committed�to�implement�the�

internationally�agreed�tax�standard.’(Organisation�for�Economic�CoͲoperation�and�Development�

2009)��In�this�fashion�Chinese�concerns�were�addressed�by�the�OECD,�which�in�a�subsequent�update�

to�the�document�included�both�Hong�Kong�and�Macau�along�with�China�in�the�set�of�‘Jurisdictions�

that�have�substantially�implemented�the�internationally�agreed�tax�standard’�(Organisation�for�

Economic�CoͲoperation�and�Development�2012).��Nonetheless,�the�tax�havens�slide�away�from�the�

economic�issues�highlighted�in�subsequent�communiqués�of�the�G20,�with�taxation�and�transparency�

only�returning�to�the�agenda�on�the�return�of�the�UK�to�the�presidency�of�the�G7�in�2013�(Christians�

2010;�Cameron�2013).�

The�tax�minimisation�practices�of�multinational�corporations,�named�by�the�OECD�as�‘base�

erosion�and�profit�shifting’,�are�now�the�focus�for�action�at�the�OECD�under�the�guidance�of�the�G20�

(see�http://www.oecd.org/tax/beps.htm).���The�OECD�released�its�‘Action�Plan�on�Base�Erosion�and�

Profit�Shifting’�in�advance�of�the�July�2013�G20�Finance�Ministers�meeting�and�containing�a�series�of�

proposed�actions�intended�to�eliminate�the�tax�minimisation�practices�permitted�under�the�current�

international�tax�regime�(Organisation�for�Economic�CoͲoperation�and�Development�2013).��The�final�

communiqué�released�after�the�Finance�Ministers’�‘endorse[d]�the�ambitious�and�comprehensive�

Action�Plan’�and�provided�further�guidance�to�the�OECD�for�taking�this�work�forward.��The�fact�that�

the�language�of�a�communiqué�is�the�product�of�compromise�among�the�ministers�implies�the�

concurrence�of�China�with�the�proposals�and�may�demonstrate�an�increased�awareness�in�the�

Chinese�government�for�the�problems�posed�by�the�offshore.��At�the�same�time,�one�perspective�

from�Hong�Kong�suggests�that�China�was�‘drafted�into�[the]�global�tax�battle’�(Shih�2013b).��Similarly�

the�Indian�finance�minister�would�have�concurred�with�the�communiqué’s�contents,�yet�India�has�

raised�its�concerns�about�the�nature�of�the�international�tax�regime�in�the�past.��Specifically,�its�

position�that�‘existing�rules�on�international�taxation�“only�take�care�of�the�interest�of�developed�

countries”’,�which�reflects�its�ongoing�conflict�with�multinational�corporations�(e.g.�Vodafone)�over�

tax�owed�to�the�Indian�state�(Houlder�2013;�Ramakrishnan�2012).�

The�limited�participation�of�China�in�the�development�of�international�finance�and�taxation�

global�governance�may�result�in�gaps�in�the�coverage�and�enforcement�of�such�governance�

measures.��The�hegemonic�position�of�the�United�States�in�producing�governance�reaches�only�so�far�

as�the�use�of�the�US�dollar�as�the�world’s�reserve�currency�and�the�US�financial�system�to�settle�

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transactions�denominated�in�US�dollars�(in�other�words,�it�reaches�as�far�as�US�financial�sanctions�

can�reach,�as�experienced,�for�example,�by�North�Korea�and�Iran).��If�China�is�not�a�participant,�while�

its�citizens�provide�a�source�of�capital�with�a�desire�to�use�the�financial�services�of�an�OFC,�the�

capacity�of�the�‘global’�enforcement�regime�is�weakened.��Clearly�the�government�leadership�of�OFC�

jurisdictions�are�aware�of�this�situation,�because�in�the�midst�of�the�hullabaloo�surrounding�

announcements�of�increased�political�will�in�Europe�to�act�against�tax�havens�in�early�May�2013�was�

a�small�news�item�about�the�British�Virgin�Islands.��As�reported�in�the�Caribbean�and�Hong�Kong�

media,�the�BVI�is�opening�an�office�in�Hong�Kong�to�‘act�as�a�point�of�contact�for�central�banks,�

monetary�authorities�and�other�regulators�in�the�region’.��The�establishment�of�the�office�is�an�

acknowledgment�for�the�significant�(over�40�percent)�amount�of�financial�service�business�in�the�BVI�

that�originates�in�the�AsiaͲPacific�region�(Shih�2013a).��And�this�announcement�was�made�a�week�

after�an�article�in�the�South�China�Morning�Post�covering�a�report�that�asserted�wealthy�Chinese�

citizens�were�looking�to�‘preserve’�their�wealth�abroad�because�of�concerns�over�the�‘the�political�

environment�and�possible�changes�in�tax�policy’�in�China�(Associated�Press�2013).���

Conclusions?��

The�introduction�of�market�capitalism�in�China�has�fuelled�a�process�of�accumulation�by�

dispossession�over�the�past�few�decades�and�created�a�wealthy�elite�in�China�that�is�concerned�for�

the�safety�and�security�of�its�wealth.��The�situation�for�this�finance�capital�and�its�flight�out�of�China�

was�described�in�the�Global�Financial�Integrity�study�and�documented�by�the�People’s�Bank�of�China�

report�(Kar�and�Freitas�2012;�People's�Bank�of�China�2008).��Whether�or�not�any�specific�element�of�

these�private�capital�flows�is�illicit,�collectively�this�finance�capital�echoes�the�situation�that�

concerned�John�A.�Hobson�at�the�beginning�of�the�20th�century�because�of�its�potential�influence�on�

government�policy.��Yet�it�is�the�features�of�globalisation,�including�the�end�of�capital�controls�in�

many�countries,�efficient�global�transportation�networks�and�highͲspeed�digital�communications,�

which�reproduce�the�present�form�of�finance�capital�as�‘postmodern’.��These�features�of�

globalisation�facilitate�the�avenues�used�by�the�wealthy�citizen�to�circumvent�Chinese�capital�

controls,�epitomised�once�again�by�Bauman’s�image�of�‘liquid’�capital.��The�problems�created�by�

capital�flight�are�recognised�in�China,�and�recommendations�contained�in�the�People’s�Bank�of�China�

Study�to�improve�antiͲmoney�laundering�procedures�are�being�implemented�(Qing�2013).��

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At�the�same�time,�one�conclusion�to�draw�from�the�preceding�discussion�is�that�the�opportunity�

for�substantive�international�change�may�have�passed�by,�that�once�again�the�chance�presented�by�a�

‘good�crisis’�has�been�lost�(Clinton�2009).��The�opportunity�was�squandered�at�the�London�G20�heads�

of�state�meeting�in�2009�because�a�compromise�was�agreed�with�China,�rather�than�convincing�

China’s�political�leadership�to�cooperate�with�a�‘grand�vision’�for�suppressing�offshore�finance.��

Subsequent�meetings�of�the�G20�did�little�to�advance�global�financial�governance�and�the�role�of�

offshore�financial�centres�as�intermediary�nodes�in�the�network�of�global�capital�flows.��The�

insistence�by�the�G7�states�to�be�the�authoritative�source�for�guidance�and�governance�on�global�

finance�is�challenged�by�the�large�developing�economies�over�taxation�as�much�as�it�is�challenged�

over�the�balance�of�power�at�the�World�Bank,�IMF�and�UN�Security�Council.��China�resisted�the�

production�of�a�tax�haven�blacklist�by�the�G20�in�2009�and�India�has�challenged�the�Model�Tax�Treaty�

first�produced�by�the�OECD�and�then�incorporated�with�little�change�into�the�Model�Tax�Convention�

of�the�UN,�because�it�fails�to�recognise�the�situation�experienced�by�developing�states�with�double�

taxation�treaties.16����Consequently,�as�suggested�by�Sharman,�the�weight�of�global�finance�is�shifting�

East�and�with�it�the�state�capacity�to�influence�global�governance�over�the�offshore�financial�centres�

(Sharman�2012a).��The�burgeoning�growth�of�Chinese�capital,�along�with�capital�accumulation�by�the�

other�BRIC�states,�means�the�cooperation�and�participation�of�these�states�and�their�

political/financial�elites�increasingly�is�important�for�any�effort�at�global�financial�governance�

including�the�reduction�of�the�onshore/offshore�divide.��

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Endnotes�1�Moreover,�the�increasingly�pejorative�application�of�these�terms�have�induced�a�move�by�a�number�of�jurisdictions�to�publicly�identify�themselves�as�‘international�financial�centres’�in�opposition�to�the�academic’s�use�of�offshore�financial�centre�(OFC)�and�the�activist’s�use�of�secrecy�jurisdiction,�see�http://www.ifcforum.org/whatͲisͲanͲifc.php.�

2�See,�for�example,�the�figures�offered�by�the�International�Monetary�Fund�in�the�report�‘Understanding�Financial�Interconnectedness’�(International�Monetary�Fund�2010).��

3�E.g.�(Organisation�for�Economic�CoͲoperation�and�Development�1998,�2011;�Financial�Action�Task�Force�2000,�2012).�

4�Legitimately�as�opposed�to�legally,�as�the�action�undertaken�may�be�deemed�illegal�in�one�jurisdiction�while�legal�in�another�(or�all�other)�jurisdiction.��The�law�is�sociallyͲconstructed�in�its�details�(Picciotto�2007;�Rawlings�2007).�

5�It�should�be�noted�that�John�M.�Hobson�is�a�greatͲgrandson�of�John�A.�Hobson,�see�the�dedication�page�for�(Hobson�2004).�

6�In�fairness�to�Bauman,�he�does�not�use�the�term�‘postmodern’,�rather�he�describes�the�present�situation�as�‘liquid’.��The�reader�not�familiar�with�Bauman’s�construction�of�the�concept�of�‘liquid�modernity’�is�encouraged�to�read�the�text�(Bauman�2000).�

7�See�in�particular�her�chapter�on�‘The�Political�Emancipation�of�the�Bourgeoisie’�which�opens�Part�two,�Imperialism�(Arendt�1958,�123�Ͳ�157).��The�presence�of�a�debate�over�the�existence�of�a�‘HobsonͲLenin�thesis’�for�19th�century�colonialism,�see�e.g.�(Eckstein�1991),�also�should�be�noted�as�well�as�efforts�to�refine�the�central�concern�over�the�role�of�investment�in�structures�of�colonialism�with�an�eye�towards�determining�causality,�e.g.�(Frieden�1994).�

8�I�leave�it�to�the�reader�to�reflect�on�the�global�financial�crisis�as�a�product�of�a�boom�in�structured�finance�based�on�house�mortgages�in�the�US.�

9�And�it�is�at�this�point�that�Hobson�offers�his�tree�analogy,�declaring�‘It�is�this�economic�condition�of�affairs�that�forms�the�taproot�of�Imperialism.’�(Hobson�1902,�¶�I.VI.18)�

10�This�observation�suggests�the�potential�for�an�analysis�of�the�subprime�mortgage�crisis�and�the�securitisation�of�US�mortgage�debt�as�an�instance�for�an�overaccumulation�of�capital�pursuing�everͲmore�risky�outlets�for�profit,�see,�e.g.�(Lucarelli�2013;�Costas�2009).�

11�But�see�(Levien�2012,�2011)�for�an�application�of�accumulation�by�dispossession�involving�land�in�India�today.�12�At�the�same�time�China�has�more�profound�data�integrity�problems�in�its�national�statistics�than�experienced�by�other�developing�economies,�see�(Breslin�2007,�Chapter�4;�Wu�2003)�

13�The�2010�study�followed�an�earlier�study�coordinated�by�the�same�research�on�income�and�consumption�published�in�2007,�‘Grey�Income�and�Income�Inequality�in�China’.�

14�The�operational�definition�of�the�high�net�worth�individual�is�one�with�more�than�US$1�million�in�investable�assets,�that�is�assets�beyond�their�primary�residence�and�collectible�items�(Capgemini�and�RBC�Wealth�Management�2013,�3).�

15�CCB�Private�Bank�is�a�subsidiary�of�China�Construction�Bank�established�in�2008�to�serve�clients�with�investable�assets�greater�than�RMB�6�million�(slightly�less�than�US$1�million�on�15�August�2013).��

16�The�government�of�India�detailed�its�concerns�on�the�Model�UN�Convention�on�Double�Taxation�in�a�letter�available�at�http://www.un.org/esa/ffd/tax/LetterIndia_13aug12.pdf.�

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