Capital flows have found new channels since financial crisis - report

LONDON (Reuters) - Over a decade on from the global financial crisis, a report shows that an increasing share of foreign capital is channelled through fund managers and other non-bank financial intermediaries than it once was.

The report by the Committee on the Global Financial System at the Bank for International Settlements said that in many countries, “portfolio investors” as they are known have surpassed banks as the largest source of foreign credit.

Other changes have included the international expansion of banks and investors based in emerging market economies (EMEs), which has also broadened the role of public sector investors in international capital markets.

The report added that, supported by improved fundamentals, capital flows to EMEs have, on average, held up better than those to advanced economies in the years since the GFC.

Looking into the impact of the COVID-19 crisis specifically, it said that when portfolio flows to EMEs initially reversed with unprecedented speed and magnitude, many developing countries had enough policy leeway to smooth the adjustment to the shock.

That said, inflows to emerging markets more broadly have remained low in comparison with the size of their economies and the frequency of sudden stops in capital inflows to EMEs has not significantly declined since the financial crisis.

But China stood out as one of the few to see a substantial increase in inflows after the GFC.

Furthermore, due to China’s growing weight in global activity, economic and policy developments in that country have increasingly shaped capital flow patterns, as demonstrated by the financial market fluctuations that followed the devaluation of the yuan in 2015.

“Since the GFC, the pipes that channel capital flows to EMEs have changed significantly,” the report said. “An increasing share of foreign capital has been channelled through investment funds and other portfolio investors.”

Foreign direct investment, which has historically been the most stable and beneficial type of capital inflow, has also been more affected by financial and tax-related strategies than it had been in the past, the report added.

Reporting by Marc Jones; Editing by Nick Macfie