Michael J. Howell founded CrossBorder Capital, a London-based advisory and investment management company in 1996, and has published a book, Capital Wars on the turbulent rise of global liquidity. In this post, he argues that despite the pool of cash and credit available to investors breaking fresh records in 2021, global liquidity may prove to be more positive for economies than for asset markets.
Money moves markets. Following the Covid emergency, huge amounts of new liquidity were pumped into the system by the world’s central bankers and financiers to help support hard-pressed economies. These flows totalled a whopping $21tn, equal to a quarter of global GDP and paced by $6tn of central bank quantitative easing, or QE. Global liquidity looks set to rise by a further $15tn in 2021, with central banks already pencilling in a further $3-4tn of QE. By year-end, the stock of global liquidity is slated to test $175tn, or twice global GDP. Twenty years ago, global liquidity could only just match that total.
The geographical sources of new liquidity in 2021 will differ noticeably from last year, with Asia and emerging markets at the forefront. In 2020/last year, the eurozone supplied roughly one-third of the increase in QE and contributed much the same to rising global liquidity, even besting the US Federal Reserve. The Bank of Japan was also active, but because Japan’s banking system made few new loans, this reduced the potential impact. The reverse was true for China, where a persistently tight People’s Bank (PBoC) belied the contribution of one-fifth of the rise in global liquidity by Chinese banks and shadow banks. The anomaly can be explained by the PBoC’s ‘directed lending’ instructions to China’s State-owned banks. In 2021, we expect Chinese liquidity to contribute one quarter of the increase in global liquidity; the US to provide over one-third of new cash and emerging markets excluding China to jump to a significant 11 per cent share from barely 4 per cent.
Digging deeper into the latest data uncovers a sharp slowdown of net inflows into the dollar. US assets have been buoyed in recent years by several one-off factors. These are now fast dissipating. These include outflows from the eurozone following the 2010-12 banking crisis and capital flight from China in the wake of President Xi Jinping’s anti-corruption drive. On top, many foreign banks bought US dollar ‘safe’ assets to satisfy new Basel III regulations. Looking ahead, Asia’s capital account is now under better control, while cross-border capital has lately shifted back into Europe and seems likely to have an appetite for the upcoming and large-scale euro-denominated debt issues. If this points to future dollar weakness, it should further spur global liquidity higher simply by encouraging cross-border investors to borrow more, cheaper dollars.
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