Emerging economies face capital outflows. Between 2009 and 2011, low interest rates in developed economies sparked massive flows of hot money into emerging economies. The hot money fueled asset inflation and spiced up economic growth too. The latter gave the perception of emerging economies decoupling from developed ones and incited even more inflow. The asset inflation eventually sparked general inflation, which slowed economic growth and diverted money from asset markets. The resulting asset deflation further decreases economic growth. Hot money is now leaving because it sees the unsustainability of the growth dynamic in emerging economies.
The Indian rupee and Brazilian real have declined by one-fifth from their recent highs, reflecting pressure from capital outflows. Because China has a controlled exchange rate, the outflow has come later, as investors believed in the safety of a government-supported exchange rate. The weakening economy this year appears to have sparked expectations of yuan depreciation. The government support of the exchange rate has become an accelerator for capital outflow, as it is increasingly viewed as a subsidy for early leavers.
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