The latest IMF report shows that since late February 2026, rising energy prices have led to upward revisions in inflation expectations, directly driving a global stock market correction and a rise in sovereign bond yields. Emerging market assets have been particularly hard hit – commodity-importing countries and economies with fragile fundamentals have been the first to bear the brunt, facing the dual pressures of capital outflows and currency depreciation.

Despite the current orderly operation of the market as a whole, the IMF emphasizes that significant asymmetric risks lurk beneath this apparent stability: existing vulnerabilities could trigger a systemic risk amplification effect should geopolitical conflicts escalate or prolong their duration.

The recent surges and crashes in South Korean and Japanese equity markets due to the Iraq War exemplify these concerns.

Risk amplification channels: the transmission path from localized pressure to systemic instability

The global financial system has multiple channels for risk transmission and amplification, which could potentially transform localized market pressures into widespread financial instability.

Vulnerability of the sovereign bond market: High public debt and increased reliance on short-term bond issuance exacerbate the debt rollover risk of core economies and may strengthen the "sovereign-bank" risk linkage, forming a closed loop of risk transmission;

External shocks to emerging markets: The procyclical nature of arbitrage trading unwinding and capital outflows may amplify the depreciation pressure on emerging market currencies, leading to a sharp tightening of financing conditions;

Risks associated with non-bank financial institutions (NBFI): Hedge funds, leveraged exchange-traded funds (ETFs) and other institutions maintain high leverage levels, which may exacerbate volatility through forced deleveraging and liquidity squeezes when the market is under pressure. Passive mutual funds and ETFs are the most sensitive to global risks, further amplifying procyclical volatility.

Asset valuation and structural risks: High stock market valuations and the concentration of companies related to artificial intelligence significantly increase the risk of downside corrections. Meanwhile, frequent supply shocks weaken the traditional hedging relationship between stocks and bonds, increasing the systemic risk of simultaneous selling of both assets. The phenomenon of South Korean retail investors flocking to buy US stocks is a microcosm of this.

Risks of private lending: Although the current liquidity mismatch problem is not prominent, the rising financial pressure on borrowers and the expansion of retail investor exposure may pose a substantial challenge to this type of semi-liquid structure.

Policy response priorities: Strengthening the financial system's resilience to risks

To address the aforementioned risks, policymakers need to take decisive action to strengthen the resilience of the financial system. Key priorities include: ensuring liquidity and the immediate availability of financing instruments; closely monitoring the spillover effects of actual inflation onto expectations; strengthening the governance framework of central banks and regulatory agencies; improving the policy system for emerging markets; promoting a sustainable path for public debt; fully implementing the regulatory requirements of Basel III; strengthening prudential supervision of non-bank financial institutions; and deepening cross-jurisdictional financial data sharing and cooperation.

Evolution of Capital Flow Patterns: The Core Intermediary Role of Non-Bank Institutions

Since the 2008 global financial crisis, the scale of cross-border securities investment inflows into emerging markets has expanded significantly, and non-bank financial institutions have become the core intermediary force in this capital flow. Every era has its own leverage.

These capital flows present multiple opportunities for emerging market economies, including supporting the development and deepening of financial markets, expanding financing channels and reducing financing costs. However, they also exacerbate their sensitivity to changes in global risk sentiment—a vulnerability that is particularly pronounced for economies with high debt levels, insufficient international reserves, or weak institutional foundations.

Risk differentiation characteristics: Differences in risk sensitivity among different investors

The financial crisis became a significant turning point in the structure of global capital flows: the sensitivity of cross-border bank loans to global risks decreased significantly, thanks to the constraints imposed on banks' risk-taking behavior by post-crisis regulatory reforms.

Cross-border securities investment debt flows remain highly sensitive to global risk conditions, and this sensitivity is even more pronounced in emerging markets.

Among non-bank financial institutions, there is a significant divergence in risk responses among different types of investors: hedge funds and investment funds react much more strongly to changes in global risk than other non-bank institutions, while among various investment funds, passive mutual funds and ETFs have the highest risk sensitivity.

This means that emerging markets that rely excessively on such risk-sensitive investors will face more severe pressure from tightening financial conditions during periods of global market stress, specifically manifested in a contraction in debt issuance and a widening spread between sovereign and corporate bond yields, which in turn poses a substantial threat to macroeconomic financial stability.

Response strategy: Building resilience and deepening international cooperation

To mitigate excessive volatility in cross-border securities investment flows, emerging markets need to adopt multi-dimensional policy measures: First, strengthen macroeconomic fundamentals and institutional quality, and establish sound fiscal buffers and external reserves;

Second, we will conduct proactive risk management in accordance with the IMF's comprehensive policy framework.

Third, the financial system's ability to cope with sudden reversals in capital flows is assessed through system-wide stress tests to ensure that financial institutions have sufficient capital and liquidity buffers.

At the same time, international cooperation is crucial, and efforts should be made to fill the loopholes in cross-border financial supervision, limit the cross-border spread of risks, and bridge the gap in global financial data.

Key areas of monitoring: Expansion risks of private lending and stablecoins

It is worth noting that the rapid expansion of emerging market private lending markets and stablecoins has become a new focus of risk monitoring, especially given the significant connections these areas have with regulated financial institutions. A regular and robust monitoring and assessment mechanism needs to be established to prevent the cross-contamination of risks.

Overall, the composition of the non-bank financial investor base in emerging markets has become a key consideration in policymaking.

By strengthening fundamentals, enhancing buffer capacity, improving regulatory frameworks, and deepening international cooperation, emerging markets can effectively enhance their resilience to fluctuations in capital flows, maximize the potential benefits of cross-border capital flows, and keep related risks within an acceptable range.