Capital Flows in a Changing World Order
The restructuring of the global order is profoundly reshaping the underlying logic of cross-border capital flows, prompting a shift from efficiency-first to security-first, and from centralized to regionalized clusters. International capital flows are on the rise, exhibiting characteristics such as short-term nature, financialization, and multi-center distribution. The reshaping of the global economic landscape, the severe divergence in recovery prospects, and the accelerated adjustment of the policy and regulatory environment have spurred large-scale and rapid global capital flows. Since the latter half of the 1980s, international direct investment has surged, and the size of international capital markets has grown rapidly. Since the outbreak of the pandemic, the total scale of international capital flows has increased, direct investment has shrunk by 42%, and securities investment liquidity has increased. The impact of international capital flows on capital-exporting countries, capital-importing countries, and the international economic situation varies.
Benefits of long-term capital flows:
Long-term capital flows, with their long duration and large volume, have a significant impact on long-term economic stability and sustainable development.
For capital-exporting countries, long-term capital flows:
① Increase the marginal return on capital;
② Facilitate the capture of world markets and promote the export of goods and services;
③ Help overcome trade protection barriers;
④ Enhance international standing.
For capital-importing countries, long-term capital flows:
① Alleviate the difficulty of capital shortage;
② Improve the level of industrialization;
③ Expand the quantity of product exports and improve the international competitiveness of products;
④ Increase employment opportunities in emerging industrial sectors and the tertiary sector, alleviating employment pressure.
The impact of short-term capital flows:
Among short-term capital flows, trade flows and financial capital flows are relatively stable, and their impact is relatively favorable. However, international trade, mainly driven by speculative capital, is of the greatest concern to the international financial community and monetary authorities of various countries because of its huge scale, rapid changes, and profound and complex impact on the national and even global economy and finance.
(1) The impact of short-term capital flows on the domestic economy is mainly reflected in its impact on the balance of payments, exchange rates, monetary policy, and domestic financial markets;
(2) The impact of short-term speculative capital on the world economy is mainly reflected in:
① its impact on the process of international economic and financial integration;
② its impact on the international monetary system;
③ its impact on the international financial market;
④ its impact on the allocation of funds internationally.
Policy Recommendations
The external situation is complex and severe, and the fragility of the international financial system is intensifying. It is necessary to be vigilant against the risks of abnormal cross-border capital flows and enhance awareness and response capabilities.
Optimize the business environment and safeguard the security of industrial and supply chains.
Faced with the complex and severe international situation, we must tap into our inherent advantages, accelerate the construction of a new dual-circulation development pattern, further unleash the potential of consumption and the large market, and promote the comprehensive layout and development of industrial and supply chains. We must regulate the behavior of investing enterprises, deepen government supervision and market guidance, avoid problems such as over-investment, blind investment, and inefficiency, improve awareness of compliant operation and safe production, improve mechanisms in areas such as employee protection, social responsibility, and resource and environmental protection, and optimize the international brand image of enterprises.
Improve the macro-prudential policy framework and solidify the foundation for resisting risks.
We need to further improve the macro-prudential policy framework, enhance counter-cyclical adjustment capabilities, enrich the reserve of policy tools in a timely manner, ensure the stable operation of the financial market, prevent asset price bubbles, and avoid international speculative capital chasing highs and lows. We must strengthen the monitoring and management of short-term capital flows, enhance the tracking and monitoring of the scale, motives, and direction of cross-border capital flows, continuously improve the cross-border capital flow monitoring and early warning system, and focus on the foreign-related business of enterprises, banks, and other entities. We must improve the construction of financial markets, enrich risk management tools, emphasize market expectation guidance, and further strengthen investor education and protection.
Strengthen the prevention and investigation of banks' overseas debt risks and improve compliance management of overseas sanctions.
We must strengthen the asset quality control of banks' overseas loans, especially strengthening risk investigation and increasing provisions for key industries and regions. We should share the credit risk of cross-border debt through syndicated loans and other means, reduce sovereign credit to countries with high external debt pressure, and actively utilize risk mitigation measures. We must strengthen the regulatory compliance of bond investment liquidity and implement hedging requirements. We must implement compliance management of sanctions against overseas institutions, improve anti-money laundering and terrorist financing capabilities, and strengthen the refined management of sanctions compliance.
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