How the US wiped out a third of global capital flows since Covid | Today’s news

In the face of calls around the world to diversify away from the dollar in recent years, the US has captured almost a third of all investment that has flowed across borders since Covid hit.

An International Monetary Fund analysis, sent to Bloomberg News upon request, shows that the share of global flows has increased — not fallen — as a dollar shortage in 2020 spooked global investors and a Russian asset freeze in 2022 raised questions about respecting the free movement of capital. . The average US share before the pandemic was just 18%, according to the IMF.

For all the anxiety over the dominance of the dollar, a rise in US interest rates to the highest levels in decades proved a major draw for foreign investors. The US has also attracted a new wave of foreign direct investment (FDI) thanks to billions of dollars worth of incentives under President Joe Biden’s initiatives to boost renewable energy and semiconductor production.

The trend marks a major shift from the pre-pandemic days when capital poured into emerging markets, including a fast-growing China. The US’s arch geopolitical rival has seen its share of global gross receipts more than halve since the pandemic hit.

But with Donald Trump promising to reverse key elements of Bidenomics if he wins the November election and the Federal Reserve signaling it will begin cutting interest rates later this year, the US advantage may not last.

“FDI flows into China and portfolio flows into the US have changed dramatically from the years before the start of the pandemic,” said Stephen Jen, chief executive of Eurizon SLJ Capital. “This new pattern of capital flows is likely to change only when policies in the US and China change.”

China’s share of gross cross-border capital flows reached 3% during 2021-23, up from about 7% during the decade to 2019, according to IMF data.

These figures show why President Xi Jinping and his lieutenants have struggled for some time to revive foreign investor interest in the country. Xi is also preparing for a congress of the Chinese Communist leadership, where new reform steps are expected – potentially shifting the investor narrative on China.

However, April data showed that overseas investment in China slowed for the fourth consecutive month. And, with interest rates around modern-day lows, domestic Chinese capital is pouring in, with domestic firms buying the most currency since 2016 in April.

In contrast, the US economic engine has attracted an increasing share of global capital. The World Bank on Tuesday raised its global growth forecast for 2024 on the back of a strong US expansion – illustrating the global impact. IMF data shows that, on a net basis, the US received inflows amounting to about 1.5% of GDP over the period 2021-2023.

For emerging markets that need more international capital to catch up with advanced economies, the situation is far from ideal. The Washington-based IMF estimates that developing countries saw a net capital outflow in recent years, for only the second time since 2000. Last year, gross FDI in emerging markets was just 1.5% of gross domestic product. – the lowest level since the beginning of the century.

“The big boy in town has gotten all the attention,” according to Jonathan Fortun, an economist at the Institute of International Finance, which tracks global capital. “It has dried up some of the money flows into emerging markets.”

The flows to the “big boy” include projects supported by the economic initiatives of the Biden administration. An example: South Korea’s Samsung Electronics Co. is slated to receive $6.4 billion in grants to boost chip manufacturing in Texas as part of a broader drive to invest a total of more than $44 billion.

There is a lot that can change.

Fed policymakers on Wednesday penciled in forecasts for a rate-cutting cycle starting at the end of the year. That could reduce the appeal to global fixed-income investors of higher-returning US assets.

Meanwhile, a divisive presidential election looms in November, adding to political uncertainty – with taxes, tariffs and worsening geopolitical tensions at the top of the list of concerns.

The rising debt has also fueled concerns that the US is headed for an inevitable fiscal cliff. This threatens some of the main reasons the US is attractive to investors, according to Alexis Crow, who heads the geopolitical investment practice for PWC – including the reputation of Treasuries as a safe investment.

“What would undermine it? The rapid expansion of the US fiscal deficit. “It’s a rare moment of political cohesion between Republicans and Democrats that the deficit doesn’t matter,” she said.

Overshadowing all that is the depth of US political discord that is sowing deeper concerns about respect for election results, the rule of law and the role of government institutions, according to Grace Fan at TS Lombard.

“From an institutional perspective, the big question ahead is whether the rule of law — aided by regulatory clarity — will prevail, on balance, during the next presidential term for foreign investors and Americans alike,” she said. “This is essential to maintaining sufficient investor confidence in US assets at a time when the de-dollarization push is slowly gaining more traction.”