Capital inflows to emerging market economies poses risks in the future
Lose monetary policy from developed countries and better economic fundamentals in emerging market countries caused massive inflows of capital into emerging market countries last decade.While foreign capital inflow can be good, it can also be destructive if not handled properly.One, they can cause asset bubbles that distort the economy and wreak havoc once they collapse.Two, it can lead to indebtedness and the proliferation of low-quality loans, which were the two major causes of the financial crisis in developed countries.Three, foreign capital inflows can be fickle and leave a country rather quickly. Such reversal can severely disrupt emerging market economies.Unexpected interest rate hikes in developed countries, lowered growth expectations in emerging market economies, and renewed risk aversion can all trigger disruptive outflows.The IMF identified the equity markets of Colombia and Mexico as hotspots for capital inflows. The phenomenon is also seen in the markets of Hong Kong, India, and Peru. Reuters

Standard & Poor’s upgraded its long-term foreign and local currency sovereign credit ratings on the People’s Republic of China to ‘AA-’ (its fourth-highest ranking) from ‘A+’.

The outlook on China’s long-term ratings is stable.

S&P explained that the stable outlook reflected its view of China’s strong capacity to absorb potential balance sheet losses, given its substantial foreign reserves and strong fiscal position

The ratings agency also applauded the country’s “exceptional growth prospects” and noted China’s strengths offset the potential for “sizable” contingent liabilities in the banking system if there were an extended economic slowdown.

China is the globe’s fastest-growing major economy and boasts $2.65-trillion in currency reserves, the world’s largest.

S&P also noted that the government deficit in China will probably fall over the next three years from 3 percent of GDP as fiscal stimulus is gradually scaled back.

GDP growth could average about 8 percent annually, S&P indicated.

We may raise the ratings again if structural reforms lead to sustained economic growth that significantly lifts the average income level, S&P said.

Conversely, we may lower the ratings if reform efforts weaken, in combination with a markedly weaker economic performance and worsening banking sector credit metrics than what we currently expect.

Moody’s raised its debt rating for China in mid-November,

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