Sunday 23 October 2016

Chinese 'hard landing' fears see biggest capital flight since 1988

Investors are on track to pull €485bn out of the emerging markets this year in flight for safety

Peter Spence

Published 04/10/2015 | 02:30

Growth of just 3pc in China could knock US and eurozone growth rates, leaving them as low as 1.7pc and 0.8pc respectively in 2016
Growth of just 3pc in China could knock US and eurozone growth rates, leaving them as low as 1.7pc and 0.8pc respectively in 2016

Investors are on track to pull €485bn out of emerging markets this year, as fears that China is headed for a 'hard landing' have prompted the greatest flight for safety since 1988.

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The amount being pulled out of emerging markets is the equivalent of almost three times the value of Ireland's GDP, or almost the size of oil rich Norway's entire economy.

The Institute of International Finance (IIF) said that the net outflows would most likely continue next year, as the prospect of US interest rate rises threaten to dampen the emerging market outlook further.

Charles Collyns, managing director and chief economist at the IIF, said that "emerging markets have seen sharp losses in recent months". The IIF's forecasts came as economists warned that emerging markets could face a brutal slowdown over the next 12 months.

The carnage in investments marks a huge reversal from 2014, when investors poured a net $32bn (€28.5bn) into emerging markets

"Unlike the 2008 crisis, the reasons for the outflows are largely internal rather than external - related to rising concerns about economic prospects and policies in China, coupled with broader uncertainties about EM growth prospects," said Mr Collyns.

Credit ratings agency Fitch said that it expected China to grow by 6.3pc next year, but cautioned that if the current turmoil continues, a collapse in public and private investment could cause growth to drop to less than half that pace.

"A Chinese contraction would intensify deflation risks . . . especially in the eurozone, where demand has remained persistently weak and inflation low," the ratings agency said in a report.

Growth of just 3pc in China could knock US and eurozone growth rates, leaving them as low as 1.7pc and 0.8pc respectively in 2016, Fitch predicted.

It is feared that those who rely on China for trade may be caught off guard. Asian economies, including Hong Kong, South Korea and Japan, as well as commodities producers such as Brazil and Russia, would be worst hit by a hard landing.

Hung Tran, the IIF's executive managing director, said that "one major, underlying reason to expect sustained pressure on EM asset prices is the high level of non-financial corporate debt in relation to GDP.

"As monetary policy continues to diverge and the Fed begins lift-off, countries with large amounts of corporate debt, especially in USD, will face difficulties, with rising prospects for corporate distress, weakening capital investment and growth," he said.

The IIF's notes of caution followed similar warnings from the International Monetary Fund earlier in the week, which said that "emerging markets should prepare for an increase in corporate failures".

Dario Perkins, an economist at Lombard Street Research, said that there was now an "obvious parallel" with the late 1990s, when a string of emerging market crises sparked fears of a global downturn.

"While the emerging crash did have a negative impact on growth in the US and Europe, those fears were overdone," Mr Perkins said. "But back then, the emerging economies were less significant and central banks had room to respond."

The prospect of higher US interest rates has already pulled capital away from emerging markets, while China has pivoted away from a credit-fuelled investment binge.

This has triggered market turbulence twice over the last year, Mr Perkins said, as investors had been alerted to the ever-growing risks of a global downturn

While emerging markets may have represented a small chunk of the global economy in the 1990s, their share of activity is now much larger.

"We may have entered part three of the global crisis that started in 2008," Mr Perkins warned, following the Lehman Brothers crash and the subsequent eurozone debt crunch.

"Even if the US and European economies prove resilient to the EM downturn, the global backdrop is certain to become more deflationary," Mr Perkins added.

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