New | Paris attack may accelerate capital outflows from emerging markets such as China
Capital outflow pressure lingers as US poised to hike rates in December
Shootings and bombings that killed more than 132 people in Paris touched the nerves of Chinese investors more than usual, as many fret worried investors will accelerate pulling their money from emerging markets and plunking them down into safer assets.
The nature of the attacks suggests an escalation in the intensity of the terrorist threat and geopolitical risks. It may strongly enhance the risk-off sentiment, given investors are already adjusting their portfolio to catch up with the US rate hike, said Hong Hao, managing director with Bocom International.
“The uncertainties of war and potential terror on other international cities are impossible to quantify. Non-commercial traders’ long dollar positions seem light given geopolitical risks,” he said, noting investors tend to increase their exposure to the US currency for at least the short term.
“The dollars’ strength will continue to pressure commodities, emerging markets and other riskier assets. Fund flows to onshore and offshore China ETFs already appear to be rolling over, for example.”
Li Yimin, a senior macro economist with Shenwan Hongyuan Securities based in Beijing, said the influence of the Paris attack may exceed peoples’ expectations, as it indicated an escalated terrorism threat, and would accelerate capital flow to safe haven assets including the US currency in the short term.
In fact, capital outflow pressure for China seems coming back again since November, as EPFR data shows a net US$662 million flew out of China last week. This came after the People’s Bank of China and other Chinese financial institutions reported net foreign currency purchases worth US$2 billion, a sign of capital inflows in October.
China is also following closely its campaign to become a reserve currency in the IMF, which is due to hand down its decision on November 30.