According to the Institute Of International Finance, global investors will begin removing capital out of emerging economies this year, for the first time since 1988, as they brace for an inevitable Chinese 'crash'.
In the years that followed the financial crisis of 2008, capital flooded into promising economies, as investors felt confident that rapid expansion in countries like Brazil and Turkey could help to offset the stalled growth in the debt-riddled Europe, US and Japan.
But now with international investors trying to limit the damage of a sharp downturn in the Chinese economy, and domestic investors in these emerging markets moving their money to overseas assets, the IIF said “we now expect that the net capital flows to emerging markets in 2015 will be negative for the first time since 1988”.
Furthermore the IIF expects “only a moderate rebound” in 2016, with expectations for strong growth in emerging economies seeming doubtful.
The Chinese authorities failed attempts to prop up the market crash in August, and an increase in capital being pulled out of the economy, is said to be the driving force behind the turnaround.
“The slump in private capital inflows is most dramatic for China … slowing growth due to excess industrial capacity, correction in the property sector and export weakness, together with monetary easing and the stock market bust has discouraged inflows” said the IIF.
In the meantime, domestic based Chinese firms have reduced their borrowing overseas, fearing that they may find themselves in trouble if the Yuan continues to depreciate, as it will make it far more costly to pay back any foreign currency loans.
According to the analysis done by the IIF, portfolio flows, have had a greater impact than the reversal of foreign investment. As a result it warns that several countries are likely to experience capital drought “Countries most in jeopardy from emerging-market turbulence include those with large corporate foreign exchange liabilities and acute political uncertainties. Brazil and Turkey combine these features”