What Is Capital Flight? It's important for investors in emerging markets to know how it affects them ILLUSTRATION: LINDSAY HOLMES By SIMON CONSTABLE Updated Feb. 8, 2016 12:49 a.m. ET Investors might hear the term capital flight a lot more this year. It's important to anyone who has invested in emerging markets, especially China. So what is it? Capital flight is the term for unusually large amounts of money leaving a country to be invested elsewhere. It often happens when investors en masse lose faith in a country's economic prospects. Last year, the amount of investment capital flowing out of emerging-markets countries exceeded the amount flowing in by about $735 billion, according to estimates from the Institute of International Finance, a Washington-based financial-services industry association. "A big chunk of that is China, says Hung Tran, executive managing director of the institute, which estimates the net outflow from China last year was $676 billion. Eight Questions to Ask Before Picking Mutual Funds or ETFs Deciding between the two isn't always straightforward. Here's help clarifying the differences and similarities. +A $ +A $ HA $ $ VIEW INTERACTIVE $ JOURNAL REPORT Insights from The Experts (http://blogs.wsj.com/experts/category/wealth-management/) Read more at WSJ.com/Wealth Report (http://online.wsj.com/public/page/journal-report-wealth.html? mg-inert-wsj) Why MORE IN INVESTING IN FUNDS & ETFS 7 Things for Investors to Watch in '16 (http://www.wsj.com/articles/7-things-investors-should-watch-for-in- 2016-1454900929) Why Fund Rankings Could Mislead (http://www.wsj.com/articles/why-fund-ratings-could-be-misleading- 1454900921) More 401(k) Choice Isn't Good (http://www.wsj.com/articles/are-too-many-choices-costing-401-k-holders- 1454900917) U.S.-Stock Funds Fell 6.3% for Month (http://www.wsj.com/articles/u-s-stock-funds-decline-6-3-in-month- 1454900919) Bond ETFs Draw SEC's Attention (http://www.wsj.com/articles/sec-raises-concerns-about-bond-etfs- MORE IN INVESTING IN FUNDS & ETFS 7 Things for Investors to Watch in '16 (http://www.wsj.com/articles/7-things-investors-should-watch-for-in- 2016-1454900929) Why Fund Rankings Could Mislead (http://www.wsj.com/articles/why-fund-ratings-could-be-misleading- 1454900921) More 401(k) Choice Isn't Good (http://www.wsj.com/articles/are-too-many-choices-costing-401-k-holders- 1454900917) U.S.-Stock Funds Fell 6.3% for Month (http://www.wsj.com/articles/u-s-stock-funds-decline-6-3-in-month- 1454900919) Bond ETFs Draw SEC's Attention (http://www.wsj.com/articles/sec-raises-concerns-about-bond-etfs- 1454900904) should investors care? Negative investment is really bad for the economy, says Mr. Tran. Or put another way, if there are fewer investment dollars available in China and other emerging markets, their economies can't grow as fast. http://www.wsj.com/articles/what-is-capital-flight-1454900927?tesla-y 2/23/2016 What Is Capital Flight? - WSJ It is also worth noting that investment is one of the most variable components of gross domestic productmuch more so, for instance, than consumption. So changes in the level of investment can have an outsize impact on growth. That means growth in China and other emerging markets will be hampered until the flow of investment capital reverses. Governments sometimes impose capital controls to stem capital flight, but the threat of controls often has the opposite of the desired effect, provoking even more money to leave the country. Mr. Constable is a writer in New York. He can be reached at reports@wsj.com. 2/3