Global banks issue alerts on China carry trade as Fed tightens and yuan falls

Three of the world’s largest banks have warned that the flood of “hot money” into China is at risk of sudden reversal as the yuan weakens and the US Federal Reserve brings forward plans to raise interest rates, with major implications for global finance.

A new report by Citigroup told clients to brace for a second phase of the “taper tantrum” that rocked emerging markets last year, but this time with China at the eye of the storm.

“There’s a dangerous scenario in which the combination of rising US short-term rates and a more volatile RMB (yuan) could lead to a rather large capital outflow from China,” said the report, by Guillermo Mondino and David Lubin.