5 Financial deglobalisation is less pronounced but still noticeable
Increasingly, there are some early signs of financial deglobalisation. This has become more noticeable as the confrontation between the US and China has moved beyond trade with a growing number of conflicts in the financial sector. In this section, we examine globalisation trends through the lenses of foreign direct investment, portfolio investment and cross-border lending.
The decline in cross-border capital flows is particularly evident in foreign direct investment (FDI), the most stable and possibly the most productive type of capital flow. Both inward (Figure 15) and outward FDI (Figure 16) flows as a share of global nominal GDP have been declining since the global financial crisis. This is especially true for outward FDI, which halved from 2.7 percent in 2008 to only 1.2 percent in 2018. This follows the trends of the decline in global trade and the fragmentation of global value chains, and could possibly be a consequence of those. While there was a noticeable recovery in outward FDI in 2019, preliminary data for 2020 points to a collapse in mergers and acquisitions, which is likely to be negative for FDI flows. It is hard to know whether FDI is no longer growing because of lack of demand, or because of constraints that make it harder for investors to operate. In any case, the differences in investment returns among recipient countries are such that the much reduced levels of FDI currently could be seen as a critical sign of fragmentation of global capital markets.
Figure 15: World inward FDI flow (% of global GDP)
Source: UNCTAD.
Figure 16: World outward FDI flow (% of global GDP)
Source: UNCTAD.
The decline in FDI flows is even more noticeable in the China–US relationship. US FDI flows into China peaked in 2002 after China’s entry into the WTO (Figure 17). Chinese FDI into the US grew until 2016 (Figure 18) even though global FDI flows have been stagnating since 2007. The collapse since 2017 could result from US constraints imposed by the Committee on Foreign Investment in the United States, which goes beyond specific technology cases, or from increased costs of doing business because of the worsening US-China relationship.
Figure 17: US FDI flow to China (% of GDP)
Source: Bruegel based on UNCTAD and www.wind.com.cn/.
Figure 18: Chinese FDI flow to the US (% of GDP)
Source: Bruegel based on UNCTAD and www.wind.com.cn/.
A less-pronounced trend than for FDI is also observable for portfolio flows. Portfolio flows into emerging markets have also slowed down globally since the European sovereign crisis in 2010 (Figure 19). The rebound of portfolio inflows after the initial COVID-19 shock has been milder than after the GFC (Figure 20). All in all, it is hard to talk of financial deglobalisation for portfolio flows yet, although it is interesting to look into the specific case of China and the US.
Figure 19: Total portfolio flows in emerging markets, share of GDP (%)
Source: Bruegel based on IIF, UNCTAD.
Figure 20: Total portfolio flows in emerging markets ($ billions)
Source: IIF. Note: to August 2020.
Deceleration in bilateral portfolio flows has been more notable between the US and China, at least in terms of holding of safe assets, than in relation to emerging markets. The US and China have been slowly but steadily downsizing their holdings of each other’s financial assets (Figures 21 and 23). Beyond the numbers, there is evidence of government attempts to decouple further. For example, the US State Department has asked universities to divest their holdings of specific Chinese assets, mainly related to Xinjiang or China’s military-related companies. That said, these moves have so far stayed bilateral and have not been followed by other countries. In fact, total foreign holdings of both Chinese bonds and US treasuries have increasing (Figures 22 and 24), which is understandable given the economic importance of these two economies.
Figure 21: US holdings of Chinese long-term securities ($ billions)
Source: Treasury International Capital. Note: to April 2020.
Figure 22: Chinese bonds, foreign ownership (trillion renminbi)
Source: Bruegel based on China Central Depository & Clearing, Shanghai Clearing House, CEIC. Note: data as of October 2020.
Figure 23: Chinese holdings of US Treasuries ($ trillions)
Source: Treasury International Capital.
Figure 24: Total foreign holdings of US Treasuries ($ trillions)
Source: Treasury International Capital.
Cross-border bank lending meanwhile has not returned to the 2008 peak level, either in dollar terms or as a share of nominal GDP, notwithstanding a gradual recovery after the GFC (Figure 25). There is a shift towards more lending into emerging markets, which comes at the cost of less lending flowing into developed markets (Figure 26). It is thus hard to argue that there is a deglobalisation trend in cross-border bank lending. Rather, its nature is changing with an increase in emerging market flows.
Figure 25: Global cross-border lending, total claims ($ trillions)
Source: Bruegel based on BIS, UNCTAD.
Figure 26: Cross-border lending, total claims ($ trillions)
Source: BIS.
In line with the reduction in cross-border lending, cross-border financing has become more difficult. For example, Chinese technology firms listed in the US have opted for secondary listings to avoid the risk of delisting from the US stock market. This has been done by Alibaba Group, JD.com and NetEase Inc, which have opted for secondary listings in Hong Kong. The Chinese government has meanwhile adopted policies to encourage the domestic funding of technology companies, including the launch in 2019 of the Science and Technology Innovation Board (SSE STAR Market) . Based in Shanghai, the STAR Market has the objective of supporting promising technology start-ups in their equity financing, helping avoid US equity markets. China has also been increasingly selective in its choice of foreign banks in the arrangement of its sovereign issuance overseas. For example, HSBC was absent from an offering of China’s US-dollar denominated bonds in October this year, possibly due to geopolitics . Since the renminbi has not yet become an international currency, China can use its sheer size in financial deals in screening market participants.
The deglobalisation trend is less pronounced than in other areas for financial flows, with the exception of FDI which is more closely linked to trade and the real economy. Nevertheless, the financial decoupling between the US and China is increasingly evident and is not only limited to FDI, though less FDI is significant. If the world returns to capital controls, there will be greater dislocation of global savings and, ultimately, lower potential growth.