MORE than 40 percent of the students in the best city-run high schools in Shanghai are considering college study overseas, Shanghai Daily reported recently from a Shanghai Education Commission survey.

That figure certainly gives pause for thought. The proportion of those considering foreign study is likely even higher in non-prime schools because students there have fewer chances of getting into a good mainland university. However, if their families are rich enough to afford tuition fees and living costs abroad, I wager many of them will be packing their bags.

About seven years ago, my colleague Tian Yi, who now works for Bloomberg News in New York, wrote an opinion piece expressing her concern about the growing trend of the best and brightest of Chinese young people going to the United States, Europe or Australia for higher education. She wondered how many of them would return. Was there a brain drain in progress?

Back then, I was not particularly concerned about the outflow of what were considered "elite" youth. After all, it is a basic right for Chinese people to pursue a better life wherever they think it exists. Whatever they achieve elsewhere reflects back positively on their motherland.

But now, when China is entering a phase of more mature development, one wonders about too much talent emigrating at a time when it is desperately needed at home.

It isn't only a diaspora of people. Money crucial to investment at home is following them offshore. According to the State Administration of Foreign Exchange, China's balance of payments in the second quarter showed US$71.4 billion in net outflows in the capital and financial account, outweighing a US$59.7 billion surplus in the current account.

Japanese securities firm Nomura painted a more startling picture by subtracting the trade balance and foreign direct investment inflows from banks' foreign-exchange purchases - a conventional way to estimate capital flows - and calculated that China's money exodus reached US$27.2 billion in July, up from US$25 billion in June and US$15.9 billion in May. It seems fair to assume that people are no longer putting blind faith in China's prospects.

Capital outflows

The State Administration of Foreign Exchange felt compelled to comment that China "suffered a certain degree of capital outflows in the first half," although it insisted there is no massive retreat of foreign investment and there is no sign yet of serious capital flight.

China used to focus its concern on "hot" money, or speculative funds, coming into the country seeking higher and faster rates of return.

The current reversal of fortunes may be interpreted by some as a sign of diminishing investor confidence in China - and that includes many domestic investors and successful business people.

Sending children to study in a foreign country has become a popular stepping-stone in the transfer of family wealth out of China.

According to a recent report by China Merchants Bank and US consulting firm Bain & Co, 27 percent of the 20,000 Chinese with at least 100 million yuan (US$15 million) in individual investment assets have already emigrated and 47 percent are considering such a move.

Although China's economy is growing, its influence spreading and its military strengthening, many rich Chinese seem to want to cash out of the past three-decade boom and squirrel their assets somewhere else.

The main reasons cited by people wanting to move abroad, according to the report, are their children's education and healthcare issues.

Of course, there are other reasons. Some may be emigrating - or escaping - while the going is good, after accumulating wealth through dodgy means. Others may be inspired by the experience of friends who have already emigrated and rave about their new homes in comfortable Western suburbs.

Despite strict currency controls, the outflow of private money from China has been considerable. The report estimated that rich Chinese have about 3.6 trillion yuan parked overseas, and I seriously wonder if that figure is underestimated.

Exodus effect

The ripples of this exodus affect the economy in small ways not tracked by macro-economists.

I once asked the owner of a steel mill in the city of Hangzhou in Zhejiang, one of China's richest provinces, how his family handled the 400,000 yuan annual cost of a daughter studying in the UK. He said it forced the family to tighten its belt. A second daughter is waiting in the wings to study abroad.

The more young people China can retain in its domestic universities, the higher the consumption spending.

Based on one local survey, Shanghai parents spend an average 23,000 yuan to purchase things every freshman wants to take to university: a desktop computer, a laptop and a mobile phone, not to mentions frills like an iPad or an iPhone.

Even in families without wealth, parents are usually willing to try their best to gratify the wishes of their children, even if it means lowering their own living standards.

Spending power

When young people are sent abroad to study, they take their spending power with them, leaving the family back home pinching pennies.

What can be done? For one thing, the world's second-largest economy needs to transform itself into a desirable country in which to live, scholars said.

Unfortunately, China at present seems gripped by "policy paralysis" as growth slows. It's caught in the middle of a dilemma. It can spend more and ease credit restrictions to stimulate growth, but it runs the risk of fanning inflation and reigniting soaring home prices.

The lesson of four years ago, when a hefty government stimulus package unleashed asset bubbles, hasn't gone unnoticed.

Maybe there is another lesson to be learned from the ancient therapies of traditional Chinese medicine. A gradual economic conditioning may be needed to smooth the energies within, rather than a sharp stimulus that addresses only short-term problems.

China can't order its people to stay within the country nor freeze the assets they have acquired legally. The only practical way is to restore public confidence in the economy and convince people that staying and working in China is both to their benefit and to the national interest. It's a tall order indeed.