Financial globalisation is surprisingly robust. Financial markets remain deeply interconnected, but with a different profile. The global value of foreign investment as a percentage of GDP has been steady since 2007, at around 180%, and now stands as an absolute figure at more than $130 trillion.
Globally, 27% of equities are held by foreign investors. That’s up from 17% in 2000. And 31% of bonds are foreign-owned, up from 18% in 2000. Only lending has declined as a share of GDP, and we also see reasons to believe that the system is likely to be more stable than it was before the crisis. In cross-border capital flows, there’s now less debt, which is intrinsically volatile. And there’s more foreign direct investment and equities, which are less volatile.
Today, FDI and equities account for two-thirds of cross-border capital flows, compared with just one-third before 2007. What should make the system more stable, overall, is the fact that financial and capital account imbalances have dropped, from 2.6% of GDP in 2007 to 1% of GDP in 2016. And the US-China share is down by half. But, of course, there are still significant risks, and there is no room for complacency.
Gross capital flows, particularly cross-border lending, remain volatile. In the last five years, more than 60% of developing countries, and over 70% of advanced economies, have had either a large decline or a surge or reversal or recovery in cross-border lending each year.
