How the US mopped up a third of global capital flows since Covid

In the face of calls around the world to diversify out of the dollar in recent years, the US has nabbed almost one-third of all the investment that flowed across borders since Covid struck.

An International Monetary Fund analysis sent by request to Bloomberg News shows that the share of global flows has climbed — not fallen — since a shortage of dollars in 2020 spooked global investors and the 2022 freezing of Russian assets stoked questions about respect for free movement of capital. The pre-pandemic US average share was just 18%, according to the IMF.

For all the angst over the dollar’s dominance, a run-up in US interest rates to the highest levels in decades proved a major draw for overseas investors. The US has also pulled in a fresh wave of foreign direct investment (FDI) thanks to billions of dollars worth of incentives under President Joe Biden’s initiatives to spur renewable energy and semiconductor production.

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

But with Donald Trump pledging to reverse the key elements of Bidenomics if he wins the November election, and the Federal Reserve signalling it will start lowering interest rates later this year, the US advantages may not last.

Policy Outlook

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

China’s share of gross cross-border capital flows amounted to 3% over the 2021-23 period, down from around 7% during the decade through 2019, according to IMF data.

Those figures showcase why President Xi Jinping and his lieutenants have for some time now been fighting to revive foreign investor interest in the country. Xi is also preparing for a Chinese Communist leadership confab where new reform steps are expected — potentially shifting the investor narrative over China.

Even so, April data showed overseas investment into China slowed for a fourth straight month. And, with interest rates around the lowest levels in modern times, domestic Chinese capital is pouring out, with local firms buying the most foreign exchange since 2016 in April.

The US economic engine, by contrast, has pulled in an increasing share of global capital. The World Bank on Tuesday raised its world growth forecast for 2024 on the back of a strong US expansion — illustrating the global impact. IMF data show that, on a net basis, the US received inflows amounting to some 1.5% of GDP over the 2021-23 period.

For emerging markets that need more international capital to catch up with advanced economies, the situation is hardly ideal. The Washington-based IMF reckons emerging nations saw an outflow of net capital in recent years, for only the second time since 2000. Last year, gross FDI to emerging markets was just 1.5% of gross domestic product — the lowest level since the start of the century.

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

Inflows to the “big boy” include projects supported by Biden administration economic initiatives. One example: South Korea’s Samsung Electronics Co. is slated to get $6.4 billion in grants to increase chip production in Texas, as part of a broader initiative to invest a total of more than $44 billion.

There’s a lot that could change.

Fed policymakers on Wednesday penciled in forecasts for a rate-cut cycle to start by year-end. That could reduce the appeal for global fixed-income investors of higher-return US assets.

Meantime, a divisive presidential election is looming in November, teeing up policy uncertainty — with taxes, tariffs and worsening geopolitical tensions top of the worry list.

Soaring debt has also prompted concerns that the US is headed for an inevitable fiscal cliff. That threatens some of the key reasons the US is attractive for investors, according to Alexis Crow, who heads the geopolitical investing practice for PWC — including Treasury securities’ reputation as a safe investment.

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

US Politics

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

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