This is where China’s outflows went

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China's rush of capital outflows may not be a huge red flag, if you look at where the funds flowed.

Sleuthing by the Bank for International Settlements (BIS), which acts as a bank for central banks, suggests a big chunk may have gone toward unwinding a once-faddish investment: Buying , offshore as a play on expectations the Chinese currency would continue to appreciate against the dollar as well as the mainland's slightly higher interest rates amid a yield-starved world.

Expectations have now shifted toward renminbi depreciation, making holding the currency relatively unattractive. Of the around $175 billion decline in cross-border loans to China in the third quarter, nearly half came from offshore depositors backing out of the yuan, the BIS said, citing data from banks reporting to it.

While analysts have speculated that investors have been selling Chinese assets and sending the fund offshore, the BIS downplayed that as a source of outflows.

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"As firms and households reduced renminbi deposits, banks outside China in turn reduced their cross-border renminbi deposits with mainland banks. In particular, banks in Chinese Taipei, Hong Kong SAR, South Korea, Macao SAR and Singapore reported a $40 billion equivalent decline in renminbi deposits in the third quarter of 2015," the BIS said. "In response to lower demand for renminbi deposits, banks in these and other jurisdictions drew down their cross-border renminbi deposits with mainland banks, leading to a capital outflow of $80 billion (PBOC data)."

Another big chunk came from Chinese companies paying down their foreign debt, the BIS said as part of its quarterly review published this month, noting that expectations the renminbi would weaken provided an incentive to pay down foreign currency debt.

The BIS analysis finds that Chinese firms reduced their cross-border net debt over the third quarter, with the amount denominated in currencies other than the renminbi accounting for around $34 billion of the outflows.

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Another $7 billion of the third quarter's outflows came from firms reducing their net foreign currency loans from mainland banks, which in turn led the banks to reduce their cross-border net liabilities, the BIS said.

The outflows weren't stanched in the fourth quarter of last year and may have accelerated, the BIS noted. While the outflows related to offshore renminbi deposits slowed to $24 billion from the third quarter's $80 billion, other data show acceleration, it said.

Onshore net foreign currency loans contracted $29 billion, widening from the third quarter's $7 billion, the BIS said.

Outflows may accelerate further: The first quarter suggests "greater strains" than the latter half of last year, the BIS said.

"Many market participants interpreted the PBOC's management of the exchange rate in early January as signaling an intended depreciation against the dollar," the BIS said. "In this event, offshore depositors might not hold onto maturing renminbi deposits and Chinese firms would still have reason to repay dollar-denominated debt."

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—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1