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China's flight of capital causes global ripples China's flight of capital causes global ripples
(about 1 hour later)
Chinese stock markets fell sharply in their final hour of trading yesterday as investors were rattled by the withdrawal of government support for shares and further capital flight after last week’s yuan devaluation. Chinese stock markets fell sharply in their final hour of trading on Tuesday as investors were rattled by the withdrawal of government support for shares and further capital flight after last week’s yuan devaluation.
The Shanghai composite index dropped 6.12%, its biggest fall since an 8.5% slide on 27 July. By the end of trading about 1,000 companies had plunged by the daily 10% limit, with state-owned firms hardest hit.The Shanghai composite index dropped 6.12%, its biggest fall since an 8.5% slide on 27 July. By the end of trading about 1,000 companies had plunged by the daily 10% limit, with state-owned firms hardest hit.
The news came as an analysis in the Financial Times found that the flight of capital from emerging markets has risen towards $1tn over the past 13 months as confidence in the world’s developing economies dwindles. Total net capital outflows from the 19 largest emerging market economies reached $940.2bn in the 13 months to the end of July, almost double the net $480bn lost over three quarters during the 2008-09 financial crisis, according to a compilation of official data and estimates by NN Investment Partners reported by the FT.The news came as an analysis in the Financial Times found that the flight of capital from emerging markets has risen towards $1tn over the past 13 months as confidence in the world’s developing economies dwindles. Total net capital outflows from the 19 largest emerging market economies reached $940.2bn in the 13 months to the end of July, almost double the net $480bn lost over three quarters during the 2008-09 financial crisis, according to a compilation of official data and estimates by NN Investment Partners reported by the FT.
Investors are sending a clear message that they are positioned for lower growth in China and emerging marketsInvestors are sending a clear message that they are positioned for lower growth in China and emerging markets
Maarten-Jan Bakkum, senior emerging markets strategist at NN, told the FT the flow could accelerate following last week’s yuan devaluation.Maarten-Jan Bakkum, senior emerging markets strategist at NN, told the FT the flow could accelerate following last week’s yuan devaluation.
Another survey yesterday also showed investors have cut exposure to emerging markets to record low levels. The monthly Bank of America Merrill Lynch poll of 202 fund managers showed that China’s slowing economic momentum and an emerging market debt crisis had replaced a eurozone break-up as the biggest global “tail risk” in investors’ minds.Another survey yesterday also showed investors have cut exposure to emerging markets to record low levels. The monthly Bank of America Merrill Lynch poll of 202 fund managers showed that China’s slowing economic momentum and an emerging market debt crisis had replaced a eurozone break-up as the biggest global “tail risk” in investors’ minds.
“Investors are sending a clear message that they are positioned for lower growth in China and emerging markets,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.“Investors are sending a clear message that they are positioned for lower growth in China and emerging markets,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
Emerging market currencies were weak across the board yesterday. In Turkey, where the prime minister, Ahmet Davutoglu, was expected to give up trying to form a government, the lira hit a record low, and the South African rand slid to a 14-year low against a firm dollar.Emerging market currencies were weak across the board yesterday. In Turkey, where the prime minister, Ahmet Davutoglu, was expected to give up trying to form a government, the lira hit a record low, and the South African rand slid to a 14-year low against a firm dollar.
“The weakness of sentiment in emerging market FX [foreign exchange] is striking,” Société Générale currency strategists said in a note to clients yesterday. “Fear of a resumption of significant capital outflows if the Fed does raise rates next month as well as fear of further yuan weakness and concern about the sluggish pace of global growth are all delivering persistent broad-based weakness.”“The weakness of sentiment in emerging market FX [foreign exchange] is striking,” Société Générale currency strategists said in a note to clients yesterday. “Fear of a resumption of significant capital outflows if the Fed does raise rates next month as well as fear of further yuan weakness and concern about the sluggish pace of global growth are all delivering persistent broad-based weakness.”
Earlier in the day China’s central bank injected the largest amount of cash into the financial system on a single day in almost 19 months, but analysts said the effect was likely to be shortlived.Earlier in the day China’s central bank injected the largest amount of cash into the financial system on a single day in almost 19 months, but analysts said the effect was likely to be shortlived.
Related: Why is China's stock market in crisis?Related: Why is China's stock market in crisis?
Experts suggested markets were still unsettled by Friday’s statement by the China Securities Regulatory Commission, the state-owned lender that had been the main channel for injecting funds into the market, that the market should “exercise its function of self-adjustment”.Experts suggested markets were still unsettled by Friday’s statement by the China Securities Regulatory Commission, the state-owned lender that had been the main channel for injecting funds into the market, that the market should “exercise its function of self-adjustment”.
“If I heard the government saying it plans to stop actively supporting the market I would sell too,” said Francis Cheung, a Hong Kong-based strategist for brokerage CLSA.“If I heard the government saying it plans to stop actively supporting the market I would sell too,” said Francis Cheung, a Hong Kong-based strategist for brokerage CLSA.
Shares were also dented by rumours that a reform of state-owned industries might not go far enough, said Guo Yanhong, a market strategist for Founder Securities. This was compounded by concerns that last week’s yuan devaluation may accelerate capital flows out of China as people seek to safeguard themselves against further currency falls, and by fears over flagging economic growth in China.Shares were also dented by rumours that a reform of state-owned industries might not go far enough, said Guo Yanhong, a market strategist for Founder Securities. This was compounded by concerns that last week’s yuan devaluation may accelerate capital flows out of China as people seek to safeguard themselves against further currency falls, and by fears over flagging economic growth in China.
“The mentality of investors is still fragile,” said Guo. “They won’t hesitate to sell their holdings and get out of the market fast whenever they expect a big fall.”“The mentality of investors is still fragile,” said Guo. “They won’t hesitate to sell their holdings and get out of the market fast whenever they expect a big fall.”
The authorities managed to halt wild stock market fluctuations in early July when they took a number of dramatic steps to limit losses for investors, including ordering securities firms to buy stocks and banning company shareholders from selling holdings.The authorities managed to halt wild stock market fluctuations in early July when they took a number of dramatic steps to limit losses for investors, including ordering securities firms to buy stocks and banning company shareholders from selling holdings.
The yuan continued to decline yesterday after last week’s devaluation, despite its midpoint being raised to 6.3966 a dollar, slightly firmer than the previous fix of 6.3969.The yuan continued to decline yesterday after last week’s devaluation, despite its midpoint being raised to 6.3966 a dollar, slightly firmer than the previous fix of 6.3969.
“With today’s unsurprising yuan fixing, volatility in the [yuan] appears to have been put back in its box. However, the internal dynamics of China’s economy continue to flash warnings that this calm will not last,” Angus Nicholson, IG market analyst, wrote in a note.“With today’s unsurprising yuan fixing, volatility in the [yuan] appears to have been put back in its box. However, the internal dynamics of China’s economy continue to flash warnings that this calm will not last,” Angus Nicholson, IG market analyst, wrote in a note.