Ever since Risk.net published its initial raft of wild speculation back in 2011, financial commentators around the world have been trying to predict how China will respond to FATCA. Never are these predictions based on any inside information from within the Chinese government; instead they’re careful Kremlinology at best, ridiculous guesses and self-aggrandising propaganda at worst. Today Reuters publishes an article falling firmly into the latter category, in which people closely involved with the development of FATCA get a public platform to proclaim that FATCA would be a great idea for China and that China is very keen on the idea of reciprocity — in the hopes that their comments will put pressure on all the smaller countries to fall into line on FATCA too:

One obstacle in the Chinese talks is likely that China wants, in return, more tax information than U.S. officials are willing to share about Chinese citizens who have assets in the United States, accountants and tax lawyers said … Treasury negotiators “will have to look at whether they can go further than they have” to meet Chinese demands, said Philip West, who served as Treasury’s international tax counsel and is now a partner at law firm Steptoe & Johnson LLP. Like the United States, China taxes citizens on worldwide income. So China should be interested in getting tax information about its citizens’ U.S. investments, tax experts said.

Our good old friend J. Richard Harvey is quoted elsewhere in the article as well; he is identified merely as a tax professor, not as the architect of FATCA whose is staking quite a bit of his professional reputation on its success. This is not the first time that Reuters has omitted this crucial little bit of information about a potential conflict of interest when quoting Harvey as an “expert source” about FATCA.

Aside from the blatantly incorrect statement about how China’s tax system works — like every other country in the world besides the US and Eritrea, China taxes based on residence and not on citizenship — it’s worth asking: where exactly did the idea originate that the Chinese government wants information about wealthy Chinese people’s asset holdings outside of China, and that the best place from which to get that information is the U.S. government? The answer: a marginal exile television station run by a racist cult, reporting on rumours spread by Chinese internet users.

The origins of the story

Since my blog host is shutting down, I’ll be moving some of my old U.S. tax-related content to a new home here at the Isaac Brock Society. This seemed like the perfect piece with which to start, since it relates directly to current news. Early last year, over on my old blog I translated an article from the New York City-based New Tang Dynasty Television (NTDTV). I described it as “the single most most unbalanced piece of reporting on U.S. taxation of non-resident citizens I’ve seen so far in the Chinese-language media” for its complete failure to mention anything about the negative effects of FATCA and FBAR on immigrants and emigrants — at a time when OVDI horror stories had already circulated throughout Chinese-speaking communities in the United States. But even NTDTV didn’t try to claim that data collected from FATCA and FBAR would be a practical tool for taking down corrupt wealthy elites in China, merely that some internet users wish it were.

For those of you who aren’t familiar with NTDTV, it’s part of the extensive overseas media empire of Falun Gong, along with newspapers you’ve probably mercifully never heard of like the Epoch Times and Clear Wisdom. Imagine a Chinese version of Sun-Myung Moon & the Reunification Church’s Washington Times. Their beliefs are a mish-mash of Chinese folk religion, Buddhism, and bizarre pronouncements from their “Master” about how mixed-race children are intellectually defective and can’t go to heaven without his personal intervention. Certainly they’re welcome to believe in whatever they want, but that doesn’t mean that anyone with a brain should take their pronouncements on tax policy seriously.

Lies go halfway around the world before the truth gets its boots

When I translated the above article, I assumed that the reach of this coverage would be limited to this rather amusing television station’s audience, and said:

Many U.S. expats in Hong Kong have a vague sense of Chinese-language “opposition media” as being on “our side” simply because they are anti-Beijing (and in some cases, pro-Tibet). When mainland Chinese officials froth at the mouth about the “opposition media” being paid shills of the U.S. government, the rest of the world pays little attention. But when those same “opposition media” put out reports like this, you start to wonder. I haven’t seen anything outside of an IRS press release that’s this uncritical of the United States’ global taxation practises. (On the bright side, if anti-Beijing media are this heavily in favor of FATCA, maybe Beijing itself will decide compliance is a bad idea.)

To make things even worse, many of the readers of articles like these are Chinese immigrants living in the U.S. who often have overseas bank accounts or assets. But this particular media outlet is affiliated with a religious group which is banned in China. Its readers are much more likely than other Chinese immigrants to distrust all the other non-religious Chinese-language media sources available to them. Thus they will not see those sources’ far more complete and balanced accounts of the effects of FATCA and FBAR on China and Chinese immigrants. And in many cases they do not read English well enough to understand reports about these complicated subjects in that language either. They’re thus in danger of facing huge fines for inadvertant FBAR and FATCA non-compliance.

Of course, I didn’t count on sensationalistic and dishonest English-language newspapers trying to sell a fake story to their mostly-monolingual Anglophone readers, but in fact this story reached well beyond the Sinophone world and started going viral a year later when the South China Morning Post repeated it without any acknowledgment of its dubious origins. And less than a month later, it’s “common sense” as far away as Mordor Washington DC: “FATCA can be a tool for fighting corruption and tax evasion in China”.

So, now that Reuters apparently has declared that random garbage written by Chinese webforum posters can be a legitimate basis for serious journalism and commentary, what other set of Chinese internet rumours will be the grounds for their next story? Perhaps they’ll tell us all about how secret agents of Manchukuo (a Japanese puppet state in Northeast China which ceased to exist in 1945) are active today in Papua New Guinea working with Taiwanese ex-president Chen Shui-bian to start riots against Chinese immigrants?

In reality, we have no idea of the Chinese government’s attitude towards FATCA aside from a single highly negative comment by a central bank legal advisor. Other than that we have no idea what is going on internally; they have certainly never made any public statements about reciprocity, merely about the desire for a forum in which they can “express China’s concerns” to the U.S. government. Even when major players in the Chinese finance industry meet with their government, outsiders are not privy to their discussions — we merely get photo-ops of the people present at their conferences, at best. In other words, the Chinese government are keeping their cards very close to their vest. So rumours that they are highly interested in reciprocity can only be assessed by whether or not they make sense.

What good is U.S. asset data to the Chinese government?

The first obvious problem with this idea is that China has already demonstrated pointed disinterest in getting information about the overseas assets of its officials or other powerful people. When Bloomberg published this kind of information, they got blocked in China. There are 83 more billionaires who sit in the National People’s Congress, and no doubt others in the higher reaches of the government — belonging to the various poorly-mapped-out factions of Chinese politics. Which of these factions do you think wants to take a risk that information exchange will allow their opponents to get the drop on them with data about how they’ve been evading taxes?

Another problem to which Homeland commentators are congenitally blind is that the U.S. is far from the only destination in which Chinese people can invest. Singapore and Canada are popular destinations for individual Chinese overseas investment, and Switzerland is also rising — and that’s not mentioning the sizable proportion of so-called “flight capital” that gets round-tripped straight bank into China to take advantage of preferential treatment for foreign investors. Hurun’s 2012 Chinese Millionaire Wealth Report found that only a third of wealthy Chinese would admit to having overseas investments, and even among them their asset allocation was heavily biased towards China, with an average of 81% of assets remaining in the country.

Hurun’s survey also found that the proportion of wealthy Chinese sending their children to the U.S. dropped slightly while Canada, France, Switzerland, and Japan all became more popular destinations. (Wealthy Chinese often purchase real estate in the countries where their children study, both for the children’s own use and to have a place of their own to stay when they come visit.) And of course, you can also guess at the relative popularity of migration destinations by seeing what their price tag is for permanent residency: Australia charges AU$5 million, an order of magnitude higher than what’s needed for the U.S.’ EB-5 green card. In otherwords, the additional tax revenue that China might be able to collect with the aid of data from the U.S. will probably be limited — possibly not even enough to cover the cost of collecting the reciprocal data that the U.S. will demand under FATCA.

A double-edged sword

But the major issue is: even if Chinese government wanted FATCA reciprocity from the U.S., they are certainly aware that the reciprocal data has not yet been collected. For reciprocity to be of any use to the Chinese government, they would probably have to demand that information about purported U.S. residents with Chinese passports be included — unlike Americans with non-U.S. permanent residency who almost all genuinely live outside the U.S., there are still some wealthy Chinese who are foolish enough to hold a U.S. green card but not actually live in the United States. Of course, the U.S. will see significant resistance to any kind of reciprocity, but in particular to this kind of reciprocity — both from the financial industry as well as, ironically, from exiled Chinese democracy activists who would be none too keen to see their banking details handed over to Beijing.

On one hand, the U.S. may simply fail to deliver on reciprocity, or the information collected may be too limited to be of any real use — by value, individual Chinese investments overseas are probably mostly in real estate, not financial assets such as securities or bank deposits (Hurun’s survey gives some support to this notion, finding that real estate was the most common asset class among wealthy Chinese with overseas holdings). But on the other hand, there is the off-chance that the U.S. succeeds in collecting this massive pile of information and putting it into a usable form. Then they will have a database that did not exist before: data about Chinese officials’ holdings in the United States.

The old saying “be careful what you wish for, lest it come true” is probably not a Chinese proverb as is popularly claimed — but it still applies to this situation. Would the Chinese government really want the U.S. to have such a database? Would they trust the U.S. government to report all this information honestly to China and not put it to any other nefarious uses, or will they suspect that the intelligence agencies are looking at this information and possibly even filtering some of it so that China doesn’t see it? Do you really think the Chinese government is chomping at the bit to give this kind of leverage to its major geopolitical competitor? From their perspective it may be better let sleeping dogs lie and leave all this data in disaggregated form in dozens of banks around the United States, and stick to purely internal means of fighting tax evasion and corruption.

Of course this is all blatant college dorm-room BS — but then, so is the stuff that Reuters printed.