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Davos Diary: Money is Rushing Out of Emerging Markets. Blame China.

China is slowing down, and pulling out hundreds of billions from emerging markets in the process.

By David Francis

January 20, 2016, 7:58 AM

DAVOS, Switzerland - There have long been concerns about how China’s slowdown would impact emerging markets. Now, there’s proof that Beijing’s pain is being felt acutely in the world’s youngest economies.

DAVOS, Switzerland – There have long been concerns about how China’s slowdown would impact emerging markets. Now, there’s proof that Beijing’s pain is being felt acutely in the world’s youngest economies.

According to the Washington-based Institute of International Finance, net outflows, or money leaving developing markets, were larger than expected last year. An IIF report released Wednesday, the opening day of the World Economic Forum in Davos, found that $735 billion in capital left emerging markets in 2015. That’s far above the $540 billion number IIF estimated in October. It’s the worst capital flight in 15 years.

The reason for this dramatic capital flight? China, which pulled out $676 billion.

“While most emerging markets have been under pressure, the dominant driver behind this sea change in emerging market capital flows has been flows to China,” the IIF said in the report.

GDP has been on the decline in emerging markets for years. After a dramatic recovery from the Great Recession, growth there has been on a steady decline. Without investment from China, still considered an emerging market even though it’s the world’s second largest economy, this trend could continue.

The new report isn’t likely to do much to improve the sour mood in Davos, where world leaders are meeting to discuss issues ranging from cyber security to banking in Africa. But the continuing slide in world markets dominated talk in the hallways, and is no doubt the subject of many off-site meetings taking place.

Both the DAX in Germany and the FTSE 100 in London was down nearly 3 percent in midday trading Wednesday. Japan’s Nikkei lost 3.7 percent, while China’s Shanghai Composite Index dropped 1 percent. Dow Jones Industrial Average Futures were also down 300 points — by midafternoon, the index was off 2.5 percent — and the price of crude oil slipped below $28.

Speaking to reporters after a climate change event, HSBC CEO Stuart Gulliver said the pain in equities would continue.

“I think we will see further adjustments before we hit equilibrium,” Gulliver said. “We’ll see a little more selloffs before we see equilibrium, but we’re closer to equilibrium than we were a couple of weeks ago; we’re towards the end of this sort of selloff.”

Photo Credit: How Hwee Young/EPA