… capital is now flowing out of emerging economies. These outflows are driving the strong dollar. Given that, the US Federal Reserve’s decision to tighten monetary policy looks like an important blunder.
… the most important reason of all [for the capital outflows] is realisation of the deteriorating performance of the emerging economies — in cyclical and, more significant still, structural terms. Of the five Brics (Brazil, Russia, India, China and South Africa), only India is experiencing a revival. Worse, on average, about a third of the slowdown among the 24 largest emerging economies between 2010 and 2014 was structural. A particular concern is the decline in the rate of growth of “total factor productivity” — a broad measure of efficiency. Also worrying is the slowing growth of trade, itself partly a result and partly a cause of weaker growth. Globalisation is losing dynamism.
… A natural way to solve [China’s part in] this problem might be to allow capital outflows, a big depreciation of the renminbi and so a re-emergence of large current account surpluses. But such a “solution” would threaten the stability of the rest of the world economy, particularly since the eurozone and Japan have already chosen much the same option. Beijing is resisting the pressure: gross foreign currency reserves have fallen by $660bn (17 per cent) since June 2014. Yet, if this continues (and it surely will) the authorities will have to tighten outflow controls, which would undermine reforms; or let the exchange rate slump, which would destabilise the world.