Regions

Capital drains from emerging markets

January 22
9:13 PM 2016

Capital outflows from developing markets were higher than it was anticipated last year, according to a report by Institute of International Finance. The report said that over 90 percent of money outflows were from China. The IIF report released during the World Economic Meeting in Davos showed that 735 billion US dollar in the capital was pulled out of the developing markets in 2015.

The Washington-based IIF said that the amount is far higher than the 540 billion US dollar estimated in October and it is the most horrible cash outflow in 15 years. The reason behind this oceanic change in emerging markets cash flow is China, which dragged out 676 billion US dollar.

The economy has been on the drop for years in developing markets and after recovery from Great Recession, development has been on a steady fall. Without investment from the second largest economy in the world, China, this drift would continue, the Foreign Policy said quoting the IIF report.

Germany DAX and London FTSE 100 were down about 3 percent during the midday trading session on Wednesday. Nikkei in Japan lost 3.7 percent and Shanghai Composite of China fell 1 percent. Dow Jones Industrial Average Futures dropped 300 points and the value of crude oil glided below $28.

Shares of emerging markets are trading at the bottommost levels since May 2009 and a measure of twenty currencies has collapsed to a record. According to Bloomberg, a breakdown in commodity values and anxiety about the slowdown in China's growth are urging investors to scrapheap properties from China to Brazil and Russia.

There have been a massive capital outflow from developing markets that benefited Japan and the euro zone. In addition, Institutional investors have been fascinated by these countries, Ibra Wane, a senior equity strategist at Amundi Asset Management said Bloomberg.

The EPOCH TIMES quoted the International Institute of Finance report as saying, "The 2015 outflows largely reflected efforts by Chinese corporates to reduce dollar exposure after years of heavy dollar borrowing, as expectations of persistent yuan appreciation were replaced by rising concerns about a weakening currency." The action refers to the carry trade paradox, which allows investors to borrow money in a nation with the small interest rate (the United States) and invest in a nation with the high interest rate (China), the Epoch Times said.

HSBC CEO Stuart Gulliver told reporters that the pain in the equity market will continue and there will additional selloffs before the market faces equilibrium. The IIF said that it expect 2016 to be a year of moderate growth in the emerging markets. Recovery in developing markets is possible if the problem simplifies and investors begin to price in better scenarios for 2017.

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