China grappled with capital flight last October. Uncertainty in the run-up to the country’s leadership transition prompted the wealthy to chase safer destinations in which to park their money. Now the opposite is happening. Strong inflows have led to a 1.6 per cent appreciation in the renminbi against the dollar so far this year. But inflows of hot funds pose a risk, especially for China’s shadow banking sector.

Interest rate disparities between Hong Kong and the mainland have played a big role. The gap can reach as much as 3 percentage points on three-month interbank rates. For money borrowed in Hong Kong and invested in China’s shadow banking system, the differential can be much wider. The FT’s China Confidential notes that US or Hong Kong dollars borrowed at 2.5 per cent can yield almost 2 per cent more if invested in wealth management products in China and 6 per cent more in riskier trust products. A rising renminbi pushes those returns up further.

Over-invoicing for exports from mainland China to Hong Kong has operated as an important channel guiding these financial flows into China. Little wonder that exports to Hong Kong have surged to the highest level since 1995 this year.