NEW YORK (Reuters) - Capital flows to emerging markets will be negative in 2017 for the fourth straight year, driven by sizeable outflows from China, the Institute of International Finance said in a report released on Thursday.
In the outlook report called “Capital Flows to Emerging Markets Eye of the Trumpstorm,” IIF estimated outflows from its group of 25 emerging market economies would total $490 billion (390 billion pounds) this year. It expects China to have around $1 trillion of resident outflows, including errors and omissions, and $560 billion of net capital outflows.
“Net capital outflow from China continues, driven by the desire by residents of China to diversify their wealth,” IIF Executive Managing Director Hung Tran said on a call with reporters.
“That means the pressure continues to remain on the Chinese authorities to affect measures to control the outflow, including using reserves to cushion downward pressure on the renminbi.”
Excluding China, emerging markets should attract inflows of $70 billion, nearly double the pace of 2016.
The outlook for overall negative capital flows in emerging markets is based largely on reduced expectations for foreign direct investment, which is expected to fall to its lowest level since the financial crisis, and portfolio equity investment, IIF said.
Outflows from China surged to a record $725 billion last year and could pick up further if U.S. companies face political pressure to repatriate profits, the group said in a report released earlier this month.
Non-resident capital inflows to emerging markets should reach $680 billion this year, $90 billion less than the IIF’s projections before Donald Trump’s surprise U.S. presidential election victory. Still, that is up marginally from $676 billion in 2016.
Capital inflows from non-residents had fallen to a 12-year low in 2015.
The group says the biggest risk will be protectionist measures to be introduced by the new Trump administration and the outcome of the French presidential election.
The French elections will be key not just to what happens in Europe, but also to the strength of the U.S. dollar, said IIF Senior Director Donja Gibbs.
“We see the strong dollar trade coming off a bit this year if the French elections go in a market-friendly direction and therefore we get a rebound in the euro,” she said during the call. “That’s going to play into a softer dollar and therefore be supportive of emerging markets.”
Reporting by Dion Rabouin; Editing by Leslie Adler and Lisa Von Ahn