HONG KONG (MarketWatch) — Starting today, Hong Kong residents can get their wheelbarrows out and switch unlimited piles of their currency into yuan, thanks to the removal of the daily conversion limit of 20,000 Hong Kong dollars (about $2,600), all to help the Shanghai-Hong Kong Stock Connect get off smoothly.

This might appear like a generous sweetener from Beijing, as holding yuan USDCNY, +0.53% USDCNH, +0.38% has been a profitable move, with a rise of roughly one-third in recent years against the Hong Kong dollar USDHKD, -0.00% .

But authorities are letting Hong Kong in on this trade at a delicate time: The U.S. Federal Reserve’s tapering actions have been creating ructions in global currency markets, and last month’s recommitment to quantitative easing by Japan has created further instability.

Although Chinese President Xi Jinping reassured the APEC conference in Beijing last week that the risks facing China’s economy were not that scary, it already looks like foreign capital has taken fright.

First, we had China’s foreign-reserve pile shrinking by $100 billion. Now, analysts warn of further signs foreign capital is heading for the exits. Daiwa Securities writes that while China’s third-quarter balance-of-payments figures released last week again showed a current-account surplus, there was an $82 billion outflow outside the current account.

Historically, investors have not lost much sleep over China’s foreign-currency position, given it has consistently run large current-account surpluses and operates a closed capital account, as well as a managed exchange rate loosely pegged to the U.S. dollar.

But the assumption that China operates anything like a closed capital account needs a rethink. Daiwa calculates that China has seen carry-trade/hot-money inflows of a massive $1 trillion since the Fed started quantitative easing (QE).

Two tricks have been used to covertly bring this money into China: carry-trade money disguised as foreign direct investment (FDI) and the over-reporting of exports.

The Japanese broker estimates the difference between utilized FDI and that in the balance-of-payments data is $644 billion since QE began and $863 billion since the yuan started appreciating against the dollar in 2005. Rather than being invested in real assets, this money has been chasing the fat yields on offer in shadow banking or trust-market products.

The over-invoicing of exports has been more widely reported, due to the significant divergence in Hong Kong import numbers from those reported by China’s central government. Daiwa puts this at over $358 million between mid 2009 and the end of August 2014.

A reversal of fund inflows of this scale risks conjuring up some highly unpleasant scenarios, from a painful credit crunch to a yuan depreciation.

China’s new reliance on foreign money means it is now hostage to global capital markets. The great capital firewall that protected it during the world financial crisis of 2008 is gone.

Previously, Chinese leaders had only to worry about instructing their state-owned banks to lend in order to keep credit flowing. Now President Xi needs to play a confidence game to keep foreign investors onboard, while also balancing the interplay of U.S. tapering and Japan’s newly expanded quantitative easing.

A more immediate problem is how to plug the gap as foreign money leaves. Daiwa says the People’s Bank of China (PBOC) has faced deterioration in its balance sheet due to Fed tapering and money outflows, which explains the use of the new 500 billion yuan medium-term lending facility. They reckon this so-called targeted money easing was used to fill the hole left by money outflows, and they also note a departure from the past, as the facility was created without being backed by U.S. dollars.

Despite this, growth in China’s money supply has been noticeably decelerating. This trend looks set to continue, as new bank lending in October fell to just 548.3 billion yuan ($90 billion), below expectations and less than September’s figure of 857.2 billion. China’s total social financing aggregate was also sharply lower at 662.7 billion yuan in October, down from 1.05 trillion yuan in September.

Daiwa warns that the scale of money outflows outside the current account is picking up and threatens China’s overall balance-of-payments position. That is when the currency issue would really come to the fore for investors.

Other exogenous factors may also pressure on the yuan. Strategist Albert Edwards at Société Générale warns that the yen’s renewed devaluation related to Japan’s QE could get out of control, given the level of asset purchases. He forecasts the U.S. dollar USDJPY, +0.13% to jump to 145 yen by the end of March, from its current ¥116 level.

He expects this will drag down other currencies in the region, including China’s yuan, and that after 32 consecutive months of deflation in producer prices, China will have no choice but to devalue.

This scenario gives another reason investors may want to hold back on converting Hong Kong dollars into yuan. The Hong Kong unit is, after all, a currency fully backed by the U.S. dollar, issued by a government that continually runs a budget surplus.

With a little patience, perhaps Hong Kong residents might still get to exchange their undervalued dollar at parity to the yuan.