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. Last Updated: 07/27/2016

China, Russia Lap Up Capital

WASHINGTON -- Net private investment in emerging market nations such as Russia and China will reach $276 billion this year, riding a surge of equity and debt-buying from the fourth quarter that was triggered by a weaker dollar.

Net private investment last year reached $279 billion, the highest since the 1997 Asian financial crisis. The figure, 32 percent higher than in 2003, exceeded an October forecast by $53 billion, the Institute of International Finance said in a report assessing 29 emerging market nations.

Nearly 60 percent of that extra $53 billion went to China, while Russia accounted for 25 percent.

The rising level of investment in emerging market nations last year sparked concern at the International Monetary Fund, which warned that a sharp change in interest rates or sudden movements in exchange rates may pose a risk to those nations and trigger capital flight. Those risks are likely to intensify this year, according to the IIF, which unites 320 banks and financial firms.

"What this means for emerging markets is be careful, be cautious," Charles Dallara, the IIF's managing director, said at a news conference. "Tighten the belt, ensure that your economic performance is on track, because the weather could get a bit stormy as we look over the course of this year and next."

The IIF said Asia will likely capture about 46 percent of the total net flows for 2005, down from 52 percent in 2004.

Meanwhile, flows to Latin America could exceed $39 billion in 2005, up from $26 billion last year, the group noted. Capital to "emerging Europe" should increase slightly this year to 37 percent of total flows, the IIF said, amid a pickup in interest in Turkey, where flows are the second highest in the region after Russia.

Private flows to Africa and the Middle East are likely to remain small at about 4 percent of the total.

About 60 percent of the surge in investment in emerging markets in the fourth quarter came from increased investment in China amid bets that the nation, which pegs its currency to the dollar, would move to a more flexible exchange rate, Dallara said.

The surge also "reflected dollar weakness and investors' search for alternatives to holding dollar assets, with some of the reallocated funds flowing into key emerging markets, notably China and Russia," said Josef Ackermann, chairman of Deutsche Bank and head of the IIF's board of directors.

Net private lending in emerging markets last year rose to $165 billion from $122 billion in 2003 and is projected to reach $177 billion this year, the group said. Commercial bank net lending almost doubled to $49 billion from $26 billion in 2003 and is forecast to exceed $42 billion this year, the group said.

Repayments to creditors such as the World Bank, the IMF and other governments is forecast to increase to more than $34 billion this year, compared with $18.5 billion in 2004.

"We are now seeing substantial levels of private capital flows to emerging markets in all areas," said Citigroup chairman William Rhodes, who is first vice chairman of the group.

(Bloomberg, Reuters)