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How China Is Dominating Emerging Market Capital Outflows

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Mar. 1 2016, Updated 7:06 p.m. ET

Capital flows have reversed trend in China

Capital flows have reversed their trend in China. The capital investment and industrialization-driven era that led the economy to double-digit growth rates before and after the subprime crisis has taken a back seat.

Demand conditions are low across the globe, causing manufacturing activity in the world’s industrialization hub to fall into recession, impeding capital flows into the country. Moreover, with authorities in China trying to shift the economy’s growth engine to a consumption-driven one, capital flows were bound to take a hit.

These factors, coupled with the overall deteriorating economic conditions in the country, have led to huge capital outflows over the recent months in China.

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China dominating emerging market capital outflows

The economy has come to a point where it’s currently dominating capital outflows among emerging markets. According to a report released by the Institute of International Finance, total net capital outflows from emerging markets (EEM) (EDZ) (VWO) in 2015 amounted to $735 billion, compared to $111 billion in 2014.

A major portion of this, about $676 billion, was accounted for by China, as the markets saw companies expediting repayment of their foreign currency obligations in light of the weakening yuan. Emerging market fund flows have also fallen significantly from their peaks in March 2013.

Funds invested in emerging market bonds and stocks have pulled out close to $250 billion since 2013, about $150 billion from equity and $100 billion from bonds. As a result, emerging markets have seen 18% depletion in their total assets, as per the Emerging Portfolio Fund Research global database.

Spelling caution for investors

While depleting foreign exchange reserves and capital outflows remain bad news for those invested in the Chinese economy, including investors in the iShares China Large-Cap ETF (FXI), the Direxion Daily FTSE China Bull 3x ETF (YINN), and the Fidelity China Region Fund (FHKAX), the depreciating yuan is certainly providing an investment opportunity to many.

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