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High Wealth Concentration, Porous Exchange Control, and Shocks to Relative Return: the Fragile State of China’s Foreign Exchange Reserve

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At a time when China is the favored investment destination in the global market, it seems unlikely that it would ever face capital flight.

Two assumptions are key in the optimistic scenario. First and foremost, China has capital control enforced by the State Administration of Foreign Exchange (SAFE), which provides a safeguard against large scale capital flows (Wen and Huo 2009). Related, if wealth in China is evenly distributed, capital flight by the wealthy few would not have any significant impact on the foreign exchange reserve. The findings of this paper cast doubt on both of these assumptions.