The Hot Money Cools on China

While the world marvels at the rise of Chinese stock prices, money is quietly leaving the country at the fastest pace in at least a decade. Louis Kuijs, Royal Bank of Scotland’s chief China economist, estimates that China lost $300 billion in financial outflows in the six months through March. Deltec International, a Bahamas investment firm, puts the number even higher.

This is an historic reversal. From 2006 until last year, China’s reserves of foreign currency quadrupled to $4 trillion. Some of the money came from trade surpluses and some from foreign investors’ spending their dollars, yen, and euros on long-term investments in China such as factories, hotels, and companies. Another chunk of the $4 trillion, though, was hot money—from investors who look around the world for the bond at the right rate or the stock that promises the quickest return. Hot money investors also borrow cheaply in one country to purchase bonds at higher rates in another. It’s legal, but they change their investments so swiftly that they can rattle bond and stock markets.