The Restructuring of International Capital Markets in the Context of De-Globalization – Analysis

By Wei Hongxu*

The ongoing impact of the COVID-19 pandemic appears to be permanently affecting global trade and investment. Energy problems, raw material problems and the shock of the global supply chain actually reflect new obstacles to globalization under the influence of populism. These changes also pose new challenges to global financial markets. In the opinion of the ANBOUND researchers, the escalation of the conflict between Russia and Ukraine and the resulting evolution suggest that capital markets are also difficult to escape from the effects of deglobalization and are moving towards a regionalized geopolitical model.

In 2000, the IMF highlighted four fundamental aspects of globalization, namely trade and international exchanges, capital and investment flows, population movements and the diffusion of knowledge. The IMF has pointed out that globalization could significantly increase human productivity and reduce costs. Countries find their areas of expertise and cost advantages through division of labor and comparative advantage, and develop their economies and improve their national living standards through international cooperation and trade. Capital markets are undoubtedly the fastest growing area in the globalization process. Currency exchange and cross-border capital flows have basically achieved instantaneous transactions, which allows capital to flow around the clock and plays a central role in resource allocation. These, to a large extent, also stimulate trade and movement of people across borders. However, after the financial crisis of 2008, the development of globalization began to come up against the constraints of inequitable global distribution, which also revealed the shortcomings of labor flows under globalization. The resulting wave of populism has led to a decline in globalization. The spread of COVID-19 has further aggravated the difficulties of movement of people and trade, and has also had a long-term impact on cross-border transactions in capital markets.

The main problem facing global capital markets is the rapid reversal of the “low interest rate” monetary environment of globalization. Within the framework of the free movement of capital, central banks generally adopt monetary policies with low or negative interest rates. The reason for this is that the movement of capital allows demand and supply to quickly balance each other, while the overissue of money leads to the reduction of capital income and the rapid equilibrium of capital throughout the world, which lowers the level of long-term inflation. This situation is now heading in the opposite direction. On the one hand, the US dollar is becoming increasingly politicized as a major international currency, forcing central banks to begin again to strengthen their respective monetary and trade sovereignty. On the other hand, distortions in global supply chains as part of de-globalization have pushed up commodity prices. This made global inflation a phase trend. “We’ve lived with low inflation and low geopolitical risk for the past 30 years,” says Tina Byles Williams, founder, CEO and CIO of investment management firm Xponance. “Spikes in either risk are treated as ‘temporary’. However, things are changing and inflation and geopolitical risks are slowly changing the market”.

In this context, we can see that more and more market investors are aware of the new uncertainties and increased risks. In this case, investments and financial transactions can no longer be analyzed with established paradigms. In particular, the series of financial sanctions imposed on Russia by the European and American governments following the Russian-Ukrainian conflict have further heightened financial market concerns about international capital flows. This has forced investors to reconsider their investment approach and adjust their portfolios. Tony Pasqsuariello, global head of hedge fund coverage at Goldman Sachs, said the world is currently undergoing a “paradigm shift” from globalization to regionalization. The judgment also pointed to “higher volatility, lower liquidity and more fragile markets” ahead. Regarding emerging markets, some international investors have also said that the West’s reaction to the Russia-Ukraine conflict has increased investment risks in the markets, causing markets to question themselves. This new change exists not only in the stock markets, but also in the commodity markets and the foreign exchange markets. Under this trend, capital and some conventional “safe haven markets” are unable to function well, which will further promote the restructuring of international capital markets and the trend of capital returning to localization.

Turning to the world’s two largest economies, the volatility of US-listed Chinese stocks over the past week also signals the start of a “decoupling” of the two capital markets. In the post-COVID-19 era, the competition between the United States and China has shifted from a trade war and a technology war to a financial war in the capital market. On the one hand, the cooling of the Chinese real estate market led to Chinese dollar-denominated bond defaults, forcing international investors to begin to steer clear of the Chinese corporate bond market. On the other hand, the regulatory dispute between the two countries has led to unprecedented volatility in Chinese stocks listed in the United States which support the capital cycle between the United States and China. Although regulators on both sides have expressed their desire for cooperation and relaxation, the return of US-listed Chinese stocks to China has become an “irresistible trend.”

At present, more than 20 Chinese companies listed in the United States have completed secondary listing to avoid the risk of delisting from the US stock market. In addition, together with the other 25 Chinese companies listed in the United States that also meet Hong Kong listing requirements, the total market capitalization of these companies will represent 96% of the total market capitalization of Chinese companies listed in the United States. United. Hong Kong’s share of Chinese dual-listed stocks is rising, reflecting a shift in focus among companies and investors. Data from the HKEX CCASS shows that the share of dual-listed Hong Kong-listed companies fell from 48% of outstanding shares to 53%, with share conversions concentrated on JD.com, Alibaba and Li Xiang One. As part of the strategic competition between China and the United States, the return of these Chinese concept stocks and the transfer of transactions means that the Chinese and American capital markets will “decouple” in practice, thus underlining the global capital market geopolitical trend. market.

In the era of rapidly developing globalization, capital flows play a major role in the global resource allocation that boosts cross-border trade, accelerates knowledge dissemination and increases human interaction. The world today is in a time of rapid change. The economy too is increasingly capitalized and virtualized. A reversal of the globalization of capital would be more damaging to national economies than in the past. Therefore, to cope with the trend of capital market restructuring, China must also build a capital market that relies on its own geopolitical environment, insist on opening up the capital market, maintain trade flows , technology and population, and maintain the international and geopolitical flow of capital, technology and talent, in order to avoid being trapped in a vicious circle of self-imposed closure.

*Wei Hongxu, ANBOUND researcher, graduate of Peking University School of Mathematics and PhD in Economics from University of Birmingham, UK