There has been no shortage of disturbing trends in Asian foreign exchange markets this year, even before China shocked traders last week with its unilateral devaluation of the yuan.
The Malaysian ringgit and Indonesian rupiah have been in freefall for months, and the Thai baht was haemorrhaging support long before the Bangkok shrine bombing.
Figures showing that emerging markets have suffered a near-$1tn (£640bn) outflow of funds over the last year give another indication that countries billed as the stars of the post-crash economy are now waning.
According to a compilation of official data and estimates by the investment bank NN Investment Partners, total net capital outflows from the 19 largest emerging market economies reached $940.2bn in the 13 months to the end of July.
The Netherlands-based bank said the figure was almost double the net outflow during the nine months following the 2008 banking collapse. Asia is not the only area to suffer. Turkey, Brazil and Mexico are among the other emerging economies to see capital flight back to the US and Europe.
As their currencies shrink in value, it takes more cash to fund foreign debt payments in dollars. The report shows that emerging markets have spent vast portions of their foreign reserves to meet obligations that were much less onerous only a year before.
Investors quitting emerging markets either sell property and stock market assets or simply take out and repatriate cash from local banks. If returned to the US, that cash might make a lower return but there will be less risk attached.
Adding to the weakening picture, the latest survey of investor sentiment by Bank of America Merrill Lynch found that the threat of a recession in China and a broader emerging market debt crisis have eclipsed the eurozone’s woes as principal concerns.
Stock markets have tumbled in response. China has already suffered one calamitous crash this year and in recent days has appeared to be on the brink of another.
A 6% plunge on Tuesday in the benchmark Shanghai Composite was followed by further 5% drop on Wednesday before a recovery pushed the index to finish 1.2% up at 3,794.11 points.
The volatile nature of emerging market stocks and shares is not just a symptom of thin trading in August or speculators exaggerating market movements with their heavy bets. These factors probably play a part, but analysts have placed greater weight on global trade figures that show a slowdown over the last six months.
Global trade declined by 8% between December 2014 and May 2015. It had previously recovered strongly since 2009, driven largely by emerging economies feeding off a China-induced stimulus to world trade. The momentum was lost last year, however, and a head of steam that saw a 40% rise in world trade over six years has vanished.
China played a big part in the slowdown after the new political leadership in Beijing announced its determination to wean the economy off cheap borrowing that had fuelled a destabilising property boom.
Diana Choyleva, chief economist at Lombard Street Research and a China expert, pointed out in a report that a contraction in the money supply, led by a retreat in bank lending, illustrated how well the policy was working.
She said: “Broad money growth, the best indicator of overall monetary conditions in an economy, has slowed to its lowest rate on record in recent months. Over the past few years the People’s Bank of China [PBoC] has introduced an alphabet soup of new monetary policy tools, but the liquidity injected through these facilities has not been large.
“Not only has the PBoC been sparing in doling out cash to the banks, but credit growth has remained fairly subdued – a stark contrast to 2009.”
She said the world was living through a deliberate rebalancing by the Chinese authorities that the west will have to accommodate in order for it to work. An overreaction in the form of competitive devaluations by the US or Japan would wreck China’s efforts and bring further anxiety to world markets.
The US is already pushing up the value of its currency with anticipation about a rise in domestic interest rates. The Federal Reserve could raise rates within the next couple of months, and though the higher rate is largely factored into currency markets, there will be another boost to the dollar when it happens.
A second rise will probably knock emerging markets further, as the US becomes an even more attractive destination for investment funds. An expected hike in the UK, where Mark Carney, the Bank of England governor, has signalled a move towards 2% starting in the spring, could intensify the pressure further.
Some emerging economies will fare worse than others. Turkey’s lira has lost around 20% of its value against the dollar so far this year, making it one of the worst performing emerging market currencies.
An inconclusive election and its proximity to fighting in Syria have played their part in fuelling fears of economic turmoil, but the broader consideration is the hefty extra $3.8bn Ankara must pay on its energy import bill and the dependence of its major corporations on borrowed funds. These funds were borrowed in dollars and are increasingly expensive to finance. Higher interest rates in the US will make the situation worse.
Earlier this week, the central bank left its base interest rate unchanged at 7.5%, despite ministers’ clamour for a cut. The bank knows such a move would make investing in Turkey less attractive and accelerate the flow of funds out of the country. Countries that spurned cheap dollars in the aftermath of the crash are expected to be insulated from US rate rises. For Turkey and the rest it will be a rocky ride.
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