每日英语：Hot Money in China Turns Cold On Country's Growth Prospects

Investors and companies are increasingly pulling money out of China and its currency in a vote of concern over its growth prospects, a development that could hinder Beijing's efforts to spark a turnaround.

New data published by China's central bank Tuesday showed China's banks were net sellers of 3.8 billion yuan ($597 million) in foreign exchange in July, suggesting that China's exporters aren't converting their dollar earnings into yuan and some investors are taking funds out of the country.

China's banks have been sellers of dollars in five of the last 10 months, purchasing a paltry 145 billion yuan in foreign exchange over that combined period, considerably less than the 905 billion yuan that flowed into the country through the trade surplus.

That is a stark contrast with much of the past decade, when confidence in China's growth and hunger for yuan meant China's banks were buying up not just the entire trade surplus, but also considerable inflows of speculative capital, known as hot money. In the first 10 months of 2008, China's banks were net purchasers of 3.6 trillion yuan in foreign exchange.

Massive inflows of capital were a key factor behind China's runaway bank lending, rising asset prices and yuan appreciation. Now, money is flowing in the other direction, contributing to falling prices for everything from real estate to equities and China's currency.

Meanwhile, the outflows are contributing to high prices for luxury apartments in Hong Kong and bringing Chinese buyers into play in property markets as far flung as London, Singapore, and San Francisco.

Calvin Sheng, an IT consultant, recently shelled out 2.5 million yuan for an apartment in Melbourne, Australia. 'I just went to the bank, bought the Australian dollars I needed for the down payment and transferred the funds to Australia,' said Mr. Sheng. 'I am going there to study, and you can see it as a balanced investment, in case there is any economic downturn risk in China.'

Mr. Sheng says he followed China's foreign-exchange controls but not everyone is as scrupulous. China keeps tight control on flows of capital in and out of the economy, but short-term speculative investments often take place under the radar. Data on banks' purchases of foreign exchange offer a glimpse of these hot-money flows.

Reduced flow of funds into China's financial system mean tighter conditions in money markets, making it more difficult for banks to make loans, and complicating Beijing's attempts to kick-start lackluster growth. China's central bank has injected more than 1.4 trillion yuan into China's financial system so far this year, but bank lending remains subdued.

'From the second half of 2011, the worsening European crisis, shocks to the global financial system, and deleveraging caused a flight to safety, with short-term capital flows leaving emerging markets and flowing into the U.S.,' Chinese government researcher Zhang Ming wrote in a recent note. 'These flows gave the Chinese economy a shock.'

Some of that includes money from private investors increasingly interested in shifting money abroad, though the exact amount is difficult to track. In a survey of 2,600 high net worth individuals conducted by China Merchants Bank and Bain & Co. for a 2011 report, almost 60% had either already completed investment immigration or are considering it.

Ann Li, who works in media in Hong Kong, has just purchased an apartment in Hong Kong, a Chinese territory that operates under its own laws and is outside China's capital controls. 'We think it is a good asset allocation. My parents have houses and investments in the mainland, so we are buying this house in Hong Kong. We also have concerns about property rights and the political outlook in China,' said Ms. Li.

Rupert Hoogewerf, founder of the Hurun Report, which tracks the wealth of China's elite, says China's rich are looking to diversify their wealth. 'China's entrepreneurs are making pure investments in commercial property and shares, and they are making personal investments in property, mainly in the U.S. and Hong Kong.' he said. 'This trend could continue for the next 10 years.'

Hunger for dollars has also contributed to a major turnaround in China's exchange rate. The yuan has depreciated 0.7% against the dollar since the start of the year, with China's central bank in the unusual position of battling pressure from the markets to drive it lower still. China still keeps a firm hold on its currency, limiting its daily movement in domestic markets within a narrow range. But within that range investors can pressure the currency higher or lower.

Many of China's domestic firms are choosing to hold their foreign earnings in dollars rather than yuan, say analysts, reducing the foreign-exchange purchases of China's banks. 'Firms are less confident about the outlook for the Chinese economy and so they are holding more of their earnings in dollars. With the yuan continuing to fall I can't see that changing in the next few months,' said He Weisheng, foreign-exchange strategist at Citibank.

Outflows of capital have contributed to China's falling asset prices. The Shanghai Composite Index is down 17% compared with a year ago. House prices are down as well, in part reflecting the government's attempt to take the air out of the sector. The price of a luxury apartment in Hangzhou in China's affluent eastern Zhejiang province has fallen 8% in the last year.

Deflating asset bubbles is a long-term positive for China's economy. But with the government focused on growth, falling prices threaten to dent confidence and investment. Capital raising by Chinese firms is down 35% in the first seven months compared with a year earlier, according to data provider CapitalVue. Construction of new residential floor space fell 13.4% year-on-year in the same period.

China's trade surplus and foreign direct investment mean near constant inflows of foreign funds into the economy. In the past, expectations of yuan appreciation meant those funds were rapidly exchanged for yuan. Monthly data on banks' purchase of foreign exchange captures those transactions. Purchases of foreign exchange that fall below monthly inflows from trade and investment suggest either hot-money outflows, or a decision by firms to hold their foreign earnings in dollars.