Flow of Capital to China Slows Sharply

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BEIJING -- Capital flows into China have slowed sharply and even reversed in recent months, according to official data that reflect how the financial crisis has disheartened investors and disrupted banks in this fast-growing nation.

The inflow shift is part of the dramatic turnaround in China's economic situation in the past few months. Earlier this year, China's currency was surging against the dollar, helping to draw tens of billions of investor dollars into the country. Policy makers fretted about whether the speculative inflows were large enough to destabilize the financial system.

Now, the Chinese currency, the yuan, has barely budged against the dollar for two months, leading many investors to unwind bets on its continued appreciation. The property market and export sector, key drivers of recent growth, seem to be deteriorating rapidly. Investors have noticed.


On Tuesday, China's central bank published figures showing its foreign-exchanges reserves -- the world's largest -- rising to $1.906 trillion at the end of September from $1.809 trillion at the end of June. But the pace of increases has slowed and the new funds seem to trail what trade and corporate investment are bringing into the country.

"I think it's pretty certain that we are seeing an outflow of capital at this stage," said Glenn Maguire, Asia economist for Société Générale in Hong Kong. However, he said, "what we are seeing is an unwinding of the hot money flows that occurred earlier in the year, rather than outright capital flight."

The new figures suggest China saw very limited, if any, inflows of speculative capital -- sometimes called "hot money" -- in July and August. And analysts estimate that anywhere from $10 billion to $25 billion left the country in September, just as the financial crisis intensified.

China's banks remain flush with cash even amid the strains affecting other nations' financial systems. Few signs exist of a credit crunch. China's large trade surpluses -- which hit a monthly record of $29.37 billion in September -- continue to push large quantities of dollars into the financial system.

Officials say they are sanguine. "The impact of this crisis on China is limited and controllable. We are confident we can maintain the stability of China's financial markets." Chinese Premier Wen Jiabao said Tuesday in a telephone conversation with U.K. Prime Minister Gordon Brown, according to a statement by China's foreign ministry.

Part of the slowdown in reserve accumulation is likely due to the recent rally of the dollar. Since China's reserves are reported in dollars, the value of its nondollar holdings has been shrinking. But currency moves don't explain all of the changes, and there were unusual strains in China's markets in September.

"This outflow likely reflected foreign financial institutions attempting to repatriate capital and hoard dollar liquidity in the midst of the credit crisis," said Logan Wright of Stone & McCarthy Research Associates in Beijing.

Even if it has slowed, the continued increase in China's foreign-exchange reserves is welcome news for the U.S. at the moment. It indicates Chinese demand remains for the Treasury debt that is being used to finance efforts to rescue the financial system. While there has been grumbling within China about the low returns on that investment, many observers don't expect the reserves to be switched away from the U.S. on a large scale.

"China is losing a bit of money investing in U.S. Treasurys, given the dollar is depreciating in a long-term trend," Erh-fei Liu, Merrill Lynch's China chairman, said in Beijing. The alternative is worse, he said: "If China stops buying Treasurys, the U.S. will stop importing from China, and that'll hurt China demand and that'll be a loss-loss situation for both countries."

Write to Andrew Batson at andrew.batson@wsj.com