From the Chinese economy to a US rate rise: Why hot money is pouring out of emerging markets

Jessica Morris
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Concerns over the Chinese economy are hurting emerging markets (Source: Getty)

China's slowing economy. alongside a looming US rate hike, is creating a headache for emerging markets.

Investors feeling the heat are set to pull around $540bn (£355bn) of cash out of emerging markets economies this year, as net flows turn negative for the first time since 1988.

Residents sending cash out of the emerging markets has accelerated amid recent financial market volatility, and at the same time, foreign investment is set to nearly halve from $1,074bn in 2014 to just $548 this year.

The 2008/9 global financial crisis was the last time a lot of hot money spewed out of emerging market economies, according to the Institute for International Finance. Nevertheless this time, the capital exodus is being driven by internal, rather than external factors.

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"The underlying factors leading to the pullback are fundamentally different. This year’s decline has been driven by a sustained slowdown in emerging market growth, and in particular by uncertainty about China’s economy amid continuing concerns about the impact of the Fed’s eventual turn to raise U.S. interest rates," according to the report.

"By contrast, back then the collapse in capital flows reflected a sudden financial crisis and deep recession in mature economies that spilled over rapidly to emerging markets."

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