CRAIG STEPHEN'S THIS WEEK IN CHINA

Feb. 9, 2014, 10:14 p.m. EST

Rich Chinese line up to leave China

Commentary: And why Hong Kong feels anxious

By Craig Stephen

HONG KONG (MarketWatch) — Getting in front of money exiting China’s porous capital controls has been one of the most dependable investment themes in recent years, from casino tables in Macau to luxury-good sales in Hong Kong. But now we have a new exit-route opening up.

Wealthy Chinese mainlanders are voting with their feet in eye-popping numbers and preparing to emigrate — taking both their money and family with them.

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First it was reported that mainlanders made up 91% of all applications for investment visas going to Australia since the scheme was launched in 2012. But this was small beer compared to Canada, as it was disclosed there was a backlog of 57,000 applications from China for investment-immigrant visas. The South China Morning Post reported 45,000 mainlanders were seeking to emigrate to British Columbia alone, with an estimated minimum combined wealth of not less than 90 billion Hong Kong dollars ($11.6 billion).

While this may not be quite an exodus in a country of over 1.3 billion people, the number of rich Chinese preparing to up stakes raises some questions. In particular: Just why are they all heading for the exits at the same time?

It could be simply cleaner air, given the pollution gripping many cities across China. Or perhaps some could be feeling twitchy as President Xi Jinping continues his year-long anti-corruption campaign.

But there is also the possibility this is at least partly a financial decision. They don’t want to hang around as the Chinese economy finally goes through a de-leveraging process and perhaps think it’s an opportune time to be getting out of yuan USDCNY -0.02% .

Taking a negative view on the yuan would be a reversal of recent years, during which continued yuan appreciation became embedded in financial markets. Thanks to Beijing’s policy-delivered exchange rate, the yuan has been one of the world’s best-performing currencies.

In most countries, the magnitude of worries over financial distress and the growth slowdown currently facing China would be expected to show up in the exchange rate. But when you have a largely pegged currency and capital controls, it is easier to conceal problems.

This means it is prudent to watch for other signs of distress emerging in the financial system. To the recent jump in interbank rates and solvency problems with shadow-bank wealth-management products, perhaps we can now add a surge in the numbers of Chinese people itching to leave?

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In general, there is still a degree of calm about these issues, as the usual response to concerns is that Beijing always finds a way out. But one way to read this emigration surge is a vote of no confidence by China’s new wealthy.

Of course there is no vote in China, and even to vote with your yuan by converting it into another country’s currency is ruled out, given capital controls.

But authorities have brought this issue to the fore as they proceed with various measures to internationalize the Chinese currency.

Coincidently, at a Chinese New Year lunch last week, one of the diners said he had this very discussion in Shanghai with colleagues the previous week, and all 10 of them said they would shift their savings to U.S. dollars if they were they free to do so.

If this small sample is at all representative, it underlines why expectations remain that Beijing will be highly cautious in opening its capital account. It might also explain the slow pace of progress so far with the much-hyped Shanghai Free-Trade Zone.

This apparent lack of confidence in the yuan is also worth mulling over in Hong Kong, which has jumped head-first into various yuan-related business.

As of the end of last year, Hong Kong was sitting on 860 billion yuan ($142 billion) in deposits, with its popularity buoyed by its steady appreciation against the Hong Kong dollar.

What is less well known is the extent to which Hong Kong has also become involved in mainland Chinese lending.

Brokerage Jefferies writes in a new strategy note that Hong Kong’s financial system has become linked to an “invisible carry trade” after a parabolic surge in lending to mainland China. Since 2009, Hong Kong banks have lent almost $400 billion to the mainland, equating to more than 150% of gross domestic product.

These chunky figures illustrate how closely Hong Kong’s fate is now tied to its large neighbor. Hong Kong clearly has a big stake in mainland China’s successful de-leveraging and reform. It would be hoped there has also been prudent currency matching in this rush to lend to the mainland if the yuan does indeed depreciate.

This interdependence also explains why local interest was piqued by stories of wealthy mainlanders emigrating on mass. Hong Kong will want to be reassured its loans will get paid back before too much money exits China.