Beneath China's "miracle," signs of weakness

For decades now, the world could bank on China pulling along global economic growth with year after year of double-digit growth. Now that the world's profit machine is sputtering, the shock waves are being felt around the planet.

China's plunging stock market comes amid other flashing lights for the country's economy. Those include the government's recent devaluation of its currency, a slide in exports, and slumping housing and car sales as Chinese consumers pare spending.

As Leo Gerard, president of the United Steel Workers, pointed out in a recent blog post, China's central planners are acting in their country's best interest as the country's rate of growth slows. But there are global consequences as commodity prices and other Asian currencies are pulled down at the same time.

For China, the challenge requires balancing the need to preserve stability at home with generating strong enough growth to foster innovation and build wealth. Crisis management on this scale also requires sending confident signals for both domestic and international consumption that China remains a good long term bet.

Yet it would seem by several indicators that well before the latest sell-off it was the Chinese themselves, and some of their largest corporations, that have been hedging their bets against the threat of slowing growth.

Consider that well over a year before the latest Chinese market gyrations, reports of a large migration of China's wealthiest residents out of the country starting popping up in the world financial press.

Hurun, a Shanghai-based wealth research firm, last reported that more than two-thirds of China's millionaires had either emigrated out of China or had plans to do so. This growing Diaspora coincided with a sharp increase in local municipal debt issued by the central government to keep the gears humming with construction projects.

"When the people that have been successful and pulled together these kinds of assets are leaving in droves, that is problematic on a number of levels," said Michael Santoro, a professor of management and global business at Rutgers Business School. "It signals the economy is in trouble, the environment is deteriorating, and it sends a depressing message to the hundreds of millions of members of the new urban middle class who don't have the means to emigrate."

"What people forget is that modern China has lived longer under economic reform than it did under communism," he added. "China still has a great success story in terms of mass upwardly mobility. Keep in mind that in 1981, 83 percent of the Chinese people were living in extreme poverty. By 2010 that number had declined to 13 percent of the population."

However, according to a 2014 World Bank study the top 10 percent of China's households holds 85 percent of the county's assets, along with 57 percent of total income.

Santoro has written extensively about China and has been traveling there for nearly a quarter of a century. As a noted backer of China's entry into the World Trade Organization in 2001, Santoro concedes "the results have been mixed on issues like democracy and human rights, and downright alarming when it comes to health and the environment."

The reporting on this wealth outflow of the well-off coincided with a crackdown by Chinese President Xi Jinping on crony capitalism. According to a report by UBS, in 2014 the number of China's billionaires grew twice as fast as in the U.S. The Boston Consulting Group estimated that close to a half a trillion dollars in Chinese cash had found its way to off-shore tax havens just as the Mainland's luxury goods sector was taken a hit and the likes of Giorgio Armani were closing their doors.

James Henry, senior fellow at Columbia University's Center for Sustainable investment says the off-shore Chinese stash is closer to a trillion dollars.

"There are innumerable ways, including properties held in the names of offshore haven companies, but the largest appears to be trade mis-invoicing -- over-invoicing imports or under-invoicing exports, with the difference parked offshore," he said. "But Chinese merchants are hardly unique in this. If you look at South Korea's steel exports, for example, you find much of them booked in Hong Kong, which doesn't consume any steel."

Over the last two years, Chinese outward foreign direct investment has exceeded $100 billion annually, Farok Contractor, a professor of management and global business at Rutgers, told CBS MoneyWatch. Most of that outflow goes to Chinese company subsidiaries and affiliates in Hong Kong, while 13 percent goes to entities located in the low-tax countries of the Caribbean.

"All of this leads to the suspicion that some portion of the outward [investment] flow emanating from China is not intended for real business purposes," Contractor said. Rather, it is "designed to enable the conversion of the renminbi into foreign currencies that are then parked at shell companies in Hong Kong or the Caribbean from where the money could be used by the Chinese owners to invest in international assets, ranging from U.S. stocks, to apartments in Sydney or Manhattan, or to park in Swiss Francs."

For years, wealthy Chinese have been buying up American real estate, whether it be depressed property in Detroit or the close to 30,000 acres of land in New York State's Adirondacks purchased last year by Alibaba's Jack Ma for conservation. Chinese companies in 2014 also went on a real estate buying spree in places like London, San Francisco, Chicago and Madrid.

Th U.S. National Association of Realtors reports that in the 12 months to March 2014 Chinese investors bought $22 billion dollars in American real estate.

"It is important to keep in mind that there are really two kinds of capital flight at work here," said Peter Kwong, professor of Asian-American and immigration studies at Hunter College. "There are the corrupt officials, and there are also Chinese businesses who are thinking it is more productive to, say, buy a strategic mining company in Canada rather than keeping their money in China where things are slowing down."

Yongding Yu, one of China's leading economists, warns that without capital controls in China, "an unforeseen shock could trigger large scale capital flight, leading to currency devaluation, skyrocketing interest rates, bursting asset bubbles, bankruptcy, and default for financial and non-financial enterprises, and, ultimately the collapse of China's financial system."