Dr. Min Zhu, the Deputy Managing Director of International Monetary Fund (IMF), gave an insightful speech on capital flows in the contemporary world and the respective policy implications at Hong Kong University.
He began by talking about the increasing interconnectedness of the world we live in. It is fascinating to see how the world gets rearranged in trade and finance terms. The increasing international trade has made countries much more dependent on each other. By showing us the map of countries according to finance terms, Dr. Zhu pointed out that the emerging markets, though enjoying a great amount of capital inflow, still have minimal financing activities relative to advanced economies.
By the measure of economic ties, the world has grown into three clusters: advanced economy, Asia, and oil. Great disparity exists in the development paths of Latin America countries divided by the Panama Canal: northern countries, Mexico for example, maintain strong economic ties with the US ; southern ones, such as Brazil and Chile, are closely related to the emerging Asian market. I guess it would be interesting if one dig into this topic and investigate why certain countries form a cluster.
There’s also increasingly strong comovements between the equity markets around the world. The finance sector expands quickly and the global liquidity increases.
Dr. Zhu mentioned a survey done by the IMF on the drives of capital flows. Most fund managers prioritized the positive economic prospects and improving equity markets in their reasons of investing in emerging markets. It is worth noting that the capital flows tend to be volatile since they are market-driven. That leads naturally to the policy concerns of monitoring capital flows, which is a much more complicated technical question.
I was relating this topic to the A+H shares (companies that are listed in both China and Hong Kong markets) my tutor introduced to us today. The huge price differential between the same stocks in the Hong Kong and the Chinese markets is due to partly the strict capital controls in China. In addition, Chinese investors don’t have many other investment alternatives, so their demand is much more inelastic than their foreign counterparts at Hong Kong.