Cayman Chinese – Newspaper Kommersant No. 23 (7468) of 02/08/2023

Contrary to popular belief, Chinese companies and entrepreneurs have mastered offshore capital flow schemes for at least the last decade – now, supposedly, about 20% of the capital attracted by PRC companies in bonds passes through classical offshores, mainly through the Cayman Islands, while the role of Hong Kong decreases. Studies by American economists on this issue show that the process will continue to develop, state-owned companies of the PRC are already involved in it, and this, to a certain extent, supports the existence of offshore companies.

New assessments by a group of researchers from US business schools – Christopher Clayton at Yale, Antonio Coppola and Matteo Maggiori at Stanford, Amanda dos Santos and Jesse Schroeger at Columbia – published in February 2023 in a series of NBER preprints, for the first time allowed a detailed assessment of the role of classic offshore in financing the Chinese economy. The group of Majori and his colleagues proposed in 2021 a new methodology for assessing the shares of national and foreign companies in the international capital market, including taking into account transactions through classic offshore companies, the work on China is its first practical application. It is interesting, among other things, because the PRC, unlike many emerging markets, is a jurisdiction with strong capital controls and a not fully convertible currency of the domestic market, so the patterns for the Russian Federation (until March 2022), Brazil, South Africa and Argentina in relation to cross-border capital operations should be significantly different from Chinese. The authors directly note that the topic of using offshore companies by PRC companies has hardly been studied by economists, it is tacitly considered that it is absent or almost non-existent.

As follows from the work of Clayton and co-authors, the weak presence of China in offshores is the reality of 2002-2009: after that, the growth in popularity of Chinese offshore operations was explosive. The latest data that the authors use is for the full year 2020 (that is, taking into account operations carried out at the height of the global COVID crisis), and assuming that the trends have not changed, now about 20% of the capital raised by PRC companies in corporate bonds comes through classical offshores (estimated at the end of 2020 – $0.6 trillion of current debt on bonds), the value of assets controlled by Chinese companies through offshores obviously exceeds $1 trillion, securities owned by them, controlled through offshores – $2.4 trillion (more 50% of the total cost). The “explosion” of operations in this area began in the late 2000s and has been practically uninterrupted since then. From that moment on, there is practically no point in talking about raising capital by Chinese companies through Hong Kong – the share of the Hong Kong dollar in such transactions is stable and small, since 2016 the attractiveness of offshore operations in Chinese yuan has been growing, the US dollar remains the main currency in these transactions, but is slowly losing value, as well as the euro, which is losing ground much faster, despite the surge in activity in euro transactions in 2015-2017.

As a consumer of offshore services, PRC companies are conservative: the main Chinese offshore is the Cayman Islands and with a significantly smaller share of Bermuda in equities, the main flow of bond operations is conducted through the British Virgin Islands and a little less through the Caymans. In general, despite China’s capital controls, the structure of operations is more reminiscent of developed than emerging economies now – Clayton and his colleagues directly attribute the development of the offshore economy to the activity of companies such as Alibaba, Tencent, Baidu, Meituan Diangping, Ping An Insurance, however, recent operations by Chinese power grids, CNOOC and Sinopec show that the PRC public sector has also appreciated the effectiveness of classic offshores. An additional attractiveness of such transactions is the possibility of lifting bilateral restrictions in China and the United States on a number of transactions in the capital market, therefore, perhaps, the growth of Chinese transactions in the Caymans will slow down the international efforts of the G7 countries to combat classic offshore companies.

Dmitry Butrin