Thoughts on Design, Technology and Culture

Money is moving in a new direction in China — out: Some Chinese are so eager to turn their yuan into other assets that when an online real estate brokerage organized a tour of foreclosure auctions in the United States, it received so many applications that it had to turn away nearly 400 people.

In Shanghai, cash-rich Chinese companies are buying high-yield bonds issued by distressed American companies at a time when most investors are steering clear of bonds even from solid companies.

All over the world, Chinese companies are sending home fewer of the billions of dollars they earn from exports.

And in Hong Kong, wealthy mainlanders are turning up at jewelry stores in growing numbers seeking diamonds, big ones.

“They’re looking for five-carat diamond rings and six-carat diamond earrings — three carats for each ear,” said Yollanda Lam, the marketing manager for the King Fook jewelry store chain here.

Together, these trends represent a potentially tectonic shift. At the same time that Chinese citizens are starting to send more money out of the country, foreign investors are pulling money out too, and slowing the pace of new investment.

“There is a recognition for sure that China is slowing down, so why keep your money there?” said Henry Lee, a Hong Kong fund manager.

Most troubling for China would be if these disparate streams represented capital flight — people taking their money out because they worry about the stability of the country.

Though there are myriad reasons to move capital around, there is also cause for concern: Chinese authorities announced Monday that 20 million migrant workers had lost their jobs. If they do not find new work, these workers could form a volatile class of unemployed, which seems certain to keep growing through this global slowdown.

Even more crucial, Chinese individuals and companies placing more of their money outside China could affect one of the constants of international finance over the last five years: China’s central role in bankrolling American trade and budget deficits.

To prevent China’s currency, the yuan, from rising, the Chinese government has been buying up the dollars pouring into the country from trade and foreign investment, accumulating more foreign exchange reserves than Japan, Saudi Arabia and Russia put together. It has paid for the dollars by printing more yuan, and has invested at least two-thirds of the dollars in American securities, particularly Treasury bonds.

If considerably fewer dollars come in, China will not have the yuan to continue buying vast amounts of Treasuries, assuming it wants to keep buying Treasuries.

Over the weekend, China’s prime minister, Wen Jiabao, said, “Whether China will continue to buy, and how much to buy, should be in accordance with China’s needs, and depend on the safety and protection of value of foreign exchange.” The statement, reported by the semi-official China News Service, was taken by some analysts as official ambivalence. It was not the first such comment by a Chinese official.

Right now, the challenge for economists is figuring out why money is leaving China — and how long the trend will last. Torrents of cash are still pouring in from trade surpluses, as imports shrank faster than exports in the final months of last year. But that inflow has been nearly balanced in recent months by an outflow of private cash from the mainland and a slowing of investment.

The quarterly pace of accumulation in China’s foreign exchange reserves plunged 74 percent over the course of last year. In the fourth quarter, it reached $40.45 billion, the lowest point since the spring of 2004, when China’s reserves were still much smaller than Japan’s.

Most economists say that actual capital flight seems the exception rather than the rule, and anecdotal evidence appears to bear that out.

For instance, though jewelry stores in Hong Kong are one barometer of trends on the mainland — because Hong Kong stores do not charge the steep luxury consumption taxes imposed on the mainland and have a reputation for not selling counterfeits — Daniel Chun, the manager of Gaily Jewelry, said it was impossible to determine how much of the increase in demand from mainlanders represented worries about China’s future.

Mr. Chun said he had seen a definite influx since December, with mainland Chinese mainly buying round-cut diamonds either set in jewelry or as loose stones. Sales to mainlanders were 50 percent higher at Chinese New Year this year compared to a year ago, he said.

The Hong Kong government said on Monday that retail sales of jewelry, clocks and watches fell 9.8 percent in December, but this may reflect plunging demand from local residents as Hong Kong’s economy slowed suddenly.

Hong Kong residents have been snapping up gold bars at a brisk pace in another sign of growing anxiety. Few mainlanders have been willing to take the risk of flouting the mainland’s stringent gold import regulations by buying gold bars, said Lin Tat Yin, a manager at Chow Tai Fook, a jewelry store chain.

Another motive for money coming out of China may be simply a perception among individuals and companies alike that better bargains are available elsewhere because of financial distress in the West.

Soufun.com, an online real estate brokerage, has organized a 10-day tour for at least 40 people to San Francisco, Los Angeles, Las Vegas and New York City, starting on Feb. 24, and found that demand outstripped the spaces available. “The people in the group are obviously interested in diversifying their investments, and the United States certainly is a very attractive location since real estate prices there have dropped drastically,” said Zhao Xingyu, a manager organizing the tour.

Chinese real estate industry executives say that there was considerable speculation here in recent years by overseas investors, especially overseas Chinese. Those purchases contributed to a real estate bubble that peaked last spring and has gradually deflated since, removing the incentive for further real estate investments here.

“Certainly a lot of the Hong Kong money seems to be coming back,” said Brad W. Setser, a fellow of geoeconomics at the Council on Foreign Relations in New York.

Beijing’s slowing accumulations of Treasuries may be partly offset by Hong King’s increased purchases of Treasuries, he said.

The Hong Kong dollar is pegged to the American dollar, and the Hong Kong Monetary Authority typically buys more Treasuries to offset strong inflows of money.

Another reason less money could be flowing into China is the government’s decision to halt the rise of the yuan against the dollar last July, and even to allow a short-lived decline against the dollar in late November. This removed the incentive for investors to put money into China in pursuit of currency gains.

Stephen Green, an economist in the Shanghai offices of Standard Chartered, said in a research note that yet another important contributor to slowing flows of money into China this winter may be that hard-up retailers in the West have been waiting longer to pay for Chinese goods. If that is the case, then more dollars may start entering China again soon.

Two agencies have primary responsibility for regulating the movement of money in and out of China — the People’s Bank of China, which is the central bank, and China’s State Administration of Foreign Exchange, which is part of the central bank but enjoys considerable independence. Officials from both agencies have said conspicuously little about capital flight in recent weeks.

The State Administration of Foreign Exchange did subtly change its policy goals at the end of last year, replacing a goal of halting unauthorized flows of money into China with a new target of seeking to control and balance inflows and outflows.

Some experts see a different motive in the reluctance of officials from these agencies to talk about capital flows. The central bank and the exchange administration were supposed to limit unauthorized investment, often described as “hot money.” But they had limited success over the last five years, said Victor Shih, a specialist in Chinese finance at Northwestern University.

“They never admitted there was hot money in the first place,” Mr. Shih said, and with a portion of that money now leaving, “some parts of the government don’t want to admit it.”