Big bucks: People walk past a Samsung Electronics advertisement at a subway station in Seoul. The South Korean tech giant stands to gain US$6.4bil in grants to increase chip production in Texas as part of a broader initiative to invest a total of more than US$44bil. — AP
NEW YORK: 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 (IMF) analysis sent by request to Bloomberg News showed 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 US dollar’s dominance, a run-up in US interest rates to the highest levels in decades proved a major draw for overseas investors.
The United States 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 US Federal Reserve signalling it will start lowering interest rates later this year, the US advantages may not last.
“FDI flows into China and portfolio flows into the United States 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 United States and China change.”
China’s share of gross cross-border capital flows amounted to 3% over the 2021 to 2023 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 last week Tuesday raised its world growth forecast for 2024 on the back of a strong US expansion – illustrating the global impact.
IMF data showed that, on a net basis, the United States received inflows amounting to some 1.5% of gross domestic product over the 2021 to 2023 period.
For emerging markets that need more international capital to catch up with advanced economies, the situation is hardly ideal.
The Washington-based IMF said 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 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 US$6.4bil in grants to increase chip production in Texas, as part of a broader initiative to invest a total of more than US$44bil.
There’s a lot that could change.
Fed policymakers last Wednesday pencilled in forecasts for a rate cut cycle to start by the end of the year.
That could reduce the appeal for global fixed-income investors of higher return US assets.
Meanwhile, 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 United States is headed for an inevitable financial cliff. That threatens some of the key reasons the United States 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 finanical deficit in the United States. It’s a rare moment of political cohesion among Republicans and Democrats that the deficit doesn’t matter,” she said. — Bloomberg
