The Restructuring of International Capital Markets under Deglobalization

The ongoing impact of the COVID-19 pandemic appears to continuously affecting global trade and investment. Energy issues, raw material issues, and global supply chain shock actually reflect new obstacles to globalization under the influence of populism. These changes also pose new challenges to global capital markets. In the view of researchers at ANBOUND, the intensification of the conflict between Russia and Ukraine and the resulting evolution portend that capital markets are also difficult to evade the affects of deglobalization and are moving toward a regionalized geopolitical pattern.

In 2000, IMF put forward four basic aspects of globalization, namely trade and international exchanges, capital and investment flows, population movements, and knowledge dissemination. The IMF 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 developing area in the process of globalization. The exchange of currencies and cross-border capital flow have basically realized instant transaction, which enables capital to flow around the clock and plays a core role in resource allocation. These, to a large extent, also drive trade and the movement of population across borders. However, after the 2008 financial crisis, the development of globalization began to encounter the constraints of unfair global distribution, which also exposed the shortcomings of the flow of labor force under globalization. The resulting wave of populism has led to a rollback of globalization. The spread of COVID-19 has further increased difficulties in the movement of population and trade, and has also had a long-term impact on cross-border transactions in capital markets.

The primary problem facing global capital markets is the rapid reversal of the “low-interest rate” monetary environment of globalization. Under the free flow 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 balance quickly, while the monetary overissue brings the reduction of capital income and the rapid balance of capital across the world, which lowers the inflation level in the long run. This situation is now heading towards the reverse. On the one hand, the U.S. dollar is becoming increasingly politicized as a major international currency, forcing central banks to start strengthening their respective monetary and trade sovereignty all over again. On the other hand, distortions in global supply chains under deglobalization have pushed up commodity prices. This has 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, the founder, CEO, and CIO at 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, it can be seen that more and more market investors are aware of new uncertainties and increased risks. In this case, investment and financial transactions can no longer be analyzed with the established paradigms. In particular, the series of financial sanctions imposed on Russia by the European and American governments following the Russia-Ukraine conflict has further increased capital 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, has said that the world is now undergoing a “paradigm shift” from globalization to regionalization. This judgment also pointed to “higher volatility, lower liquidity, and more fragile markets” ahead. As for emerging markets, some international investors also said that the reaction of the West to the conflict between Russia and Ukraine has increased investment risks in the markets, resulting in a challenge to the markets. This new change exists not only in equity markets, but also in commodity markets and 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.

As far as the world’s two largest economies are concerned, the volatility in U.S.-listed Chinese stocks over the past week also signals the beginning of a “decoupling” of the two capital markets. In the post-COVID-19 era, the competition between the U.S. and China has expanded from a trade war and a technological war to a financial war in the capital market. On the one hand, the cooling of China’s real estate market has led to the defaults of dollar-denominated Chinese bonds, causing international investors to start to stay away from China’s corporate bond market. On the other hand, the regulatory dispute between the two countries has led to unprecedented volatility in the U.S.-listed Chinese stocks that sustain the capital cycle between U.S. and China. Although the regulators of both sides have expressed their desire for cooperation and detente, the return of U.S.-listed Chinese stocks to China has become an “irresistible trend”.

At present, more than 20 U.S.-listed Chinese companies have completed secondary listing in order to avoid the risk of delisting from the U.S. stock market. In addition, together with the other 25 U.S.-listed Chinese companies that also meet the Hong Kong listing requirements, the total market capitalization of these companies will account for 96% of the total market capitalization of U.S.-listed Chinese companies ADRs. Hong Kong’s share of dual-listed Chinese shares is growing, reflecting a shift in focus among companies and investors. Data from the HKEX CCASS show that the Hong Kong-listed portion of dual-listed companies has increased to 53% from 48% of outstanding shares, with share conversions concentrated in, Alibaba, and Li Xiang One. Under the strategic competition between China and the United States, the return of these China concepts stocks and the transfer of transactions mean that the Chinese and American capital markets will be “decouple” in a practical sense, thus highlighting the geopolitical trend of the global capital market.

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

Final analysis conclusion:

Changes in the global political and economic situation inevitably bring about the restructuring of the capital market and a phased trend towards more regionalization and geo-politization of the capital markets. This will accelerate the deeper integration of regional economies and prepare them for the next phase of new globalization.

Writer by Wei Hongxu
A researcher at ANBOUND, graduated from the School of Mathematics at Peking University and has a PhD in economics from the University of Birmingham, UK

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ANBOUND is a multinational independent think tank, specializing in public policy research, incl. economy, urban and industry, geopolitical issues. Est. 1993.

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ANBOUND is a multinational independent think tank, specializing in public policy research, incl. economy, urban and industry, geopolitical issues. Est. 1993.