Liam Bailey and Flora Harley track the movement of wealth around the world, starting with a unique analysis of global money flows
One of the critical issues we consider each year in The Wealth Report is where money is moving from – and where it is heading. It is this issue that ultimately helps to drive market performance in the 100 luxury residential markets we consider in our Prime International Residential Index (PIRI).
Helpfully, newly released numbers allow us to provide an intriguing snapshot of global monetary flows. In 2016, the Bank for International Settlements (BIS) started to release data provided by 29 reporting locations on the aggregate level of foreign deposits by “non-banks” in their financial institutions.
Of the reporting locations, 27 also analyse deposits on a location-by-location basis. Non-banks include individual, corporate and government deposits.
This provides a unique perspective on the movement of money around the globe, helping to confirm the direction of travel of wealth and investment flows.
Chinese funds deposited in reporting locations rose by US$172 billion, a staggering 721%, in the three years to June 2017. Over the same period deposits held by Russian non-banks increased by US$6 billion, a 21% increase.
The outbound flow of funds from China in particular, but also from other locations like Russia, has been a key trend affecting global asset markets over recent years. Despite official attempts to rein in these flows, the BIS data confirms that the trend looks likely to continue.
One subject we discuss at length later in this article is the growth of legislation aimed at improving financial and tax transparency globally. The OECD-inspired Common Reporting Standard (CRS) is leading the way in this area.
Anecdotally, some investors appear keen to remain outside the scope of the regulations. The US and Taiwan are in the minority of major economies that have not committed to the CRS, and over the three years to June 2017, ahead of the implementation, non-bank deposits held in each of these locations increased by US$122 billion and US$25 billion respectively. In the US, there was a rise of $90 billion in the 12 months to the end of June 2017 alone.
The impact of Chinese government policy has affected Hong Kong and Macau in different ways. While Macau has seen a 10% decline in deposits in the 12 months to June 2017, Hong Kong has become increasingly popular as an investment destination, with mainland Chinese investors increasing their deposits here by US$19.5 billion over the same period.
Bahamian non-bank deposits, in the locations that report on them, fell by 25% in the past year. The data show that deposits held by Panamanian non-banks also dropped by 20% in the last year. Deposits held in the Channel Islands declined markedly in the three years to June 2017, falling by 31% in Guernsey and 14% in Jersey. In the Isle of Man, the drop was 28%.
The above changes can in part be explained by currency shifts, in particular for the Channel Islands. But some commentators interpret these declines as supporting the narrative that the advent of the CRS and other transparency measures is eroding some of the benefits offered by traditional low-tax jurisdictions, leading to an outflow of funds.
Over the three years to June 2017, the amount of money held in Switzerland covered by this analysis has fallen by 8%. Once again, the introduction of the CRS and wider moves against bank secrecy could be contributory factors. In addition, it should be noted that Switzerland’s interest rates became negative in 2015, meaning that investors were effectively paying to keep money in the bank, prompting an exodus of funds.
As more locations join the CRS and its scope potentially widens, the global pattern of wealth movements is likely to become ever more tangled.
*Note on the data
Not all reporting locations cover every nationality. For the periods analysed, 17 of the 20 reporting locations featured in our graphic cover 150 nationalities, while for four of them this extends to over 200. All deposits are reported in billions of US dollars, converted using the end-of-quarter exchange rate. Our illustrations show the change in total deposits held in 20 of the reporting locations over the past year by 20 origin locations. The thickness of the line reflects the change in value over the past year, with 190 showing an increase and 194 showing a decrease.
The size of the node represents total deposits held in the destination country from all origin locations they report on as at June 2017.
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