Is China at risk of instability?

In a chapter contributed to my recent edited volume on country and political risk, Michel-Henry Bouchet of the Skema Business School makes the case for a new indicator of political risk: capital flight. He writes: “when attempting to understand the complexities of country and political risk, it is perhaps the most useful to turn to those who are embedded in the country’s matrix of social, political and economic forces, and hence understand these forces best – that is, a country’s residents.” To be sure, there are also more direct indicators of political behavior that one might wish to use to track political risk. Protests, for instance. Or even – as has lately become popular in the era of big data – natural language analysis of postings to blogs and social media. But, as Bouchet points out, capital flight has much to recommend it as an indicator, because capital flight involves putting one’s money on the line: “there are costs and risks associated with transferring one’s money abroad. When citizens do so consistently over time and en masse, it is meaningful.” (To this, I would add, somewhat cynically: in contrast to protests or social media posts, capital flight has the advantage of being, in the main, an indicator of the behavior of a nation’s wealthy elite, who are perhaps more likely to be in the know in regard to the true state of their country’s politics and economy.) Of course, where money is involved, one must also consider financial motivations. Bouchet and a co-author have constructed a model explaining capital flight in 43 countries. An overvalued currency and negative real interest...