estimated $735bn in net capital outflows last year with all but $59bn of that coming from China. In October, the global finance industry group had predicted 2015 would see net outflows from emerging markets of $540bn, the first since 1988.
January 20, 2016 10:18 am
Capital flight from China worse than thought
Shawn Donnan in Washington
The flow of capital out of China and other emerging markets was significantly worse than previously thought in 2015, according to new estimates.
In a report released on Wednesday the Washington-based Institute of International Finance said outflows increased as overseas investors pulled out of emerging markets and Chinese companies scrambled to pay off overseas loans in the final three months of the year amid a weakening renminbi.
Emerging markets saw an estimated $735bn in net capital outflows last year with all but $59bn of that coming from China. In October, the global finance industry group had predicted 2015 would see net outflows from emerging markets of $540bn, the first since 1988.
The latest grim data comes amid growing concerns about faltering growth in China and other major emerging economies that has led some to start calling the end of a charmed era for emerging markets. They also highlight the continuing opacity of many of those markets and the difficulty of measuring the extent of capital flight out of places like China that impose strict controls on the movement of money.
The discrepancy revealed on Wednesday, the IIF said, came in large part because of accelerating capital flight from China in the final three months of last year via channels used to circumvent capital controls. Over-invoicing for exports, cash transactions and other such flows recorded as “errors and omissions” accounted for $216bn of the $676bn in China’s net outflows in 2015, according to the IIF.
“This is a really unprecedented event that we are seeing outflows for emerging markets on this scale,” said Charles Collyns, managing director and chief economist at the IIF.
Some of the outflows from China had been productive, he said. Chinese companies had been sending money offshore to pay off dollar-denominated and other overseas debt over the past year in anticipation of a weakening of the renminbi. That had left many Chinese companies with healthier balance sheets than they had a year ago.
But there was still a risk that Chinese outflows could accelerate rather than slowdown this year with any such move likely to impact markets and economies around the world. Already, this year’s experience, he said, was that “storms in China tend to be amplified around the global financial system”.
Despite the turmoil in Chinese and global markets over the past fortnight, the IIF said that its daily data indicated that the capital flows out of China had been far less this month than those seen during the market upheaval in August last year. But that had followed what it called an “exceptional streak” of six straight months of outflows in the second half of 2015.
The IIF had previously forecast a return to modest net inflows into emerging markets in 2016, but in the report released on Wednesday it said it now expected net outflows of $448bn this year as slowing growth in emerging economies continued to weigh on investor sentiment.
“Premature ageing of emerging markets may continue to weigh on growth prospects, and market volatility in early 2016 has weighed on risk appetite,” said Hung Tran, executive managing director at the IIF. “EM equity and debt markets are now trading at very steep discounts to mature economies — which could be viewed as attractive by some investors for strategic re-entry. However, poor fundamentals will subject markets to continued high volatility.”
China is expected to see continuing “large capital outflows” this year as its economy continues to slow and authorities intervene heavily to stabilise the renminbi, the IIF said.
The group’s economists wrote that they expected the flows out of China and Russia to slow this year but it was not certain. They also anticipated the oil price rising from its current lows to around $46 for the year and Middle East producers being able to conserve reserves as a result.
Its prediction for 2016, however, was dependent on a higher oil price, a modest bounce back in growth in emerging economies to 4 per cent from 3.6 per cent in 2015 as recessions ended in Brazil and Russia and the US Federal Reserve raising rates only twice this year.
And there was a significant chance of any of those failing to come true, the IIF acknowledged.
The Fed could move more aggressively this year than markets expected and there was also a risk the world could see a “sustained period of even lower oil prices than envisioned”, the IIF said.
Either of those could combine with persistently large current account deficits and other domestic factors in vulnerable countries such as Turkey, Colombia, South Africa and Peru to lead to a reversal in capital flows this year, the IIF’s economists wrote.
Separately, the UN warned on Wednesday that flows of foreign direct investment were likely to decline in 2016 because of the fragile state of the global economy and decelerating developing economies.
New figures released by the UN Conference on Trade and Development showed a surge in FDI around the world in 2015 to an estimated $1.7tn. But that was due largely to an increase in mergers and acquisitions, particularly in advanced economies, with new greenfield investments in developing economies actually registering a decline. |
