How the US captured a third of global capital flows since the pandemic

Despite a rise in calls to diversify away from the dollar in recent years, the United States has cornered nearly a third of all global cross-border investment since the Covid pandemic.

An International Monetary Fund analysis submitted by request to Bloomberg News shows the share of global flows has risen — not fallen — since dollar shortages in 2020 spooked global investors and a Russian asset freeze in 2022 fueled doubts about respect for the free movement of capital. According to the IMF, the average before the pandemic in the United States was only 18%.

Despite angst over the dollar’s hegemony, raising interest rates in the United States to the highest levels in decades proved too attractive to foreign investors. The country has also attracted a new wave of foreign direct investment (FDI) thanks to billions of dollars in incentives from President Joe Biden to stimulate renewable energy and semiconductor production.

It is a radical change from before the pandemic, when capital was pouring into emerging markets like China. The Asian giant has seen its share of global gross receipts more than halve since the pandemic broke out.

However, with Donald Trump promising to reverse key elements of Biden’s economic plans if he wins the November election, and the Federal Reserve signaling that it will begin lowering interest rates later this year, the United States may lose its dominant position. advantage.

Political perspectives

“FDI flows to China and portfolio flows to the United States have changed radically since the years before the pandemic” stated Stephen Jen, CEO of Eurizon SLJ Capital. “This new pattern of capital flows is likely to change only when policies in the United States and China change.”.

China’s share of gross cross-border capital flows rose to 3% in 2021—23, down from 7% in the decade to 2019, according to IMF data.

Those figures show why President Xi Jinping and his lieutenants are fighting so hard to revive foreign investor interest in the country. Xi is also preparing for a conference of Chinese communist leaders where new reforms are expected, which could change investor narratives about China.

Still, data for April showed that foreign investment to China slowed for the fourth consecutive month. And, with interest rates around the lowest levels in modern times, domestic Chinese capital is pouring out, with local businesses buying the most foreign currency since 2016 in April.

The neighborhood giant

The American economy, by contrast, has attracted a growing share of the world’s capital. The World Bank on Tuesday raised its global growth forecast for 2024 thanks to strong expansion in the United States. IMF data shows that, on a net basis, the United States received capital inflows worth 1.5% of GDP during the period 2021—23.

For emerging markets, which need more international capital to catch up with advanced economies, the situation is not ideal. The IMF estimates that emerging countries have recorded net capital outflows in recent years, for the second time since 2000. Last year, gross FDI in emerging markets represented only 1.5% of gross domestic product (GDP), the lowest level since the beginning of the century.

“The big boy in the neighborhood has monopolized all the attention“said Jonathan Fortun, an economist at the Institute of International Finance, who tracks global capital, “That has dried up some of the money flows to emerging markets”.

Flows to the “big boy” include projects supported by the Biden administration’s economic initiatives. An example: South Korea’s Samsung Electronics Co. will receive $6.4 billion in subsidies to increase chip production in Texas, as part of a broader initiative to invest more than $44 billion.

But everything can change.

On Wednesday, the Fed said it expects the cycle of rate cuts would begin at the end of the year. This could reduce the attractiveness of US bonds for investors around the world.

Do deficits matter?

And a divisive presidential election looms in November that will increase political uncertainty, with taxes, tariffs and worsening geopolitical tensions at the top of the list of concerns.

Rising debt also raises concerns that the United States is headed toward a fiscal cliff. This threatens some of the key reasons the country has become attractive to investors, such as the security of investing in Treasuries, according to Alexis Crow, who heads PWC’s geopolitical investment practice.

“What could undermine it? The rapid expansion of the fiscal deficit in the United States. We are experiencing a rare moment of political cohesion between Republicans and Democrats in which the deficit does not matter“, he claimed.

Above all is the deep political discord in the United States, which is sowing deeper concerns about respect for election results, the rule of law and the role of government institutions, according to Grace Fan of TS Lombard.

“From an institutional point of view, the big question that arises is whether the rule of law, with the help of regulatory clarity, will prevail during the next presidential term, for both foreign and American investors.“, it states. “This is critical to maintaining sufficient investor confidence in US assets at a time when the de-dollarization push is slowly gaining more traction.”.