Sun said the hot money that has been flowing into China in the past couple of years is mostly invested in short-term financial instruments, including the various wealth management products created by domestic banks.

These funds mostly have short maturities of no more than three months. They are favored by short-term foreign investors not only because the returns are higher than on debt instruments in the US or Europe, but also because of the potential for foreign exchange gains from the appreciation of the renminbi against the dollar and other major currencies, Sun said.

But with bond yields rising in the US, and expectations for the yuan to ease against the dollar as QE is scaled back, it is highly possible for hot money to flow back to the US.

EPFR Global, a global fund flow tracker, said $5.2 billion was pulled from mainland and Hong Kong equity markets from May 22 to June 12, a record high since the financial turmoil of 2008, the China Securities Journal reported.

Other reasons have been suggested for China's sudden liquidity tightening.

China's cabinet issued a statement on Wednesday after Premier Li Keqiang chaired a meeting. The statement said the central government is maintaining a prudent monetary stance and persisting in reasonably managing the money supply and curbing new credit for unauthorized construction projects in industries with severe excess capacity.

Analysts said the intent is also to curb carry trades that raise risk to the financial system while disrupting real economic development.

"It seems that the People's Bank of China and some other regulators could be taking the opportunity of tight funding conditions to punish some small banks that had taken advantage of stable interbank rates to finance their purchase of higher-yield bonds," Bank of America Merrill Lynch said in a report on Thursday.