The end-of-summer meltdown in emerging markets, when the MSCI stock benchmark collapsed by 9% in August, created a bigger fear than just stock losses—chiefly that emerging countries are experiencing crippling capital outflows.
Earlier this summer a pair of articles in the Financial Times and Wall Street Journal highlighted the fears after the fifteen largest emerging economies recorded larger capital outflows in the first quarter this year than they had during the same period of the financial crisis in 2009. Hot money rushing out of a country destabilizes a country’s financial system and plays havoc on its currency— sometimes leading to full-blown crises. (See Russia 1998.)
Is that what’s really happening?
Emerging markets have in fact experienced massive outflows this year—more than $400 billion in the first half of 2015, according to NN Investment Partners. However, and this is the key point in the data, much of that has originated from a single source: China.
Another researcher, Emerging Advisors Group, looked at 39 emerging markets it follows, minus China, and found capital outflows to be minimal—certainly nothing compared to crisis times of 2008-09, the Fed tapering in 2013, or the collapse of oil and the rise of the U.S. dollar in late 2014.
Even after the August stock collapse, when global investors yanked billions out of the countries, a crisis didn’t appear in store for emerging countries, says Emerging Advisors president Jonathan Anderson, one of the most respected EM watchers and formerly global emerging markets economist at UBS. “If you look at the behavior of local depositors, residents on shore, what we don’t see is massive crisis level flight,” he said in a recent interview. “But there is a China outflows problem.”
Attention shifted to China in mid-August after the country’s central bank devalued the yuan’s value to the dollar, which worried pundits that Chinese money would flee the country as the currency fell. Some commenters were predicting China’s foreign exchange reserves to fall by $200 billion in the month—a rate that would deplete its foreign reserves in just over a year.
On Monday, evidence arrived that showed the doomsayers were far too alarmist. China’s central bank said in August, reserves fell by $90 billion, which while up substantially from $75 billion in July, was not crippling, considering that China still has $3.6 trillion worth.
It turns out hot money isn’t escaping China, nor are rich officials and elite fleeing with cash for Australia. Instead, according to Emerging Advisors’ Anderson, many inside the country are fleeing China’s currency. The U.S. dollar’s rapid rise over the past two years, compared to the recently devalued and falling renminbi (RMB), means Chinese businesses and elite are opting to hold more dollars. China’s central bank foreign reserves are declining because it is spending dollars to prop up the renminbi, but there’s an offsetting increase of foreign assets in China’s commercial banks, which aren’t counted in the foreign reserves figure. “It’s not really a story about money rushing out of China—it’s a story about getting out of the renminbi at the margin,” he says.
Here’s Capital Economics’ Julian Evans-Pritchard on China’s central bank’s announcement:
This would be the largest one-month fall in dollar terms on record but not the rout many were talking about. … It’s also worth reiterating that capital outflows are not the same as capital flight. Much of the “outflows” simply represent increased holdings of foreign currency deposits by Chinese firms and banks, or reductions in their foreign currency debts both at home and abroad.
If the numbers don’t worsen, don’t fall for the panic in China or other emerging markets. Capital isn’t rushing out the door.
Again, Anderson: “Basically, it’s people looking at global currency fundamentals and taking a bit the other direction,” he says, meaning that people are trading in some yuan for a rising U.S dollar. “Which is why, I stress, this is likely to be cyclical phenomenon rather a massive structural problem in the next five years.”
A version of this story appears in Fortune’s September 15 issue.