China and the U.S.: a new balance in the global financial system  

Professor Billio and Professor Pelizzon

A joint research project that involves Ca’ Foscari University of Venice, Goethe University Frankfurt, the Massachusetts Institute of Technology, the University of Massachusetts Amherst, and Stockholm University is analysing the changing role of the U.S. in the global financial system

The international team is proposing a new approach to understand how China and other countries are currently competing for the dominant role in the global financial system. The results are being presented at the Geopolitics and Economics Kiel-CEPR Conference.

The U.S.A.’s dominant role in the global financial system is changing. The commercial conflict with China that began in 2018 with the presidency of Donald Trump and the outbreak of the COVID-19 pandemic have reduced the primacy of the U.S. in the global market. At the same time, China is becoming the second most powerful player in the market in terms of its influence on global financial centres. Finally, the war in Ukraine and the energy crisis are favouring these processes and the creation of a bi-polar or multi-polar world.
The analysis is conducted by an international team of researchers who use data from minute-per-minute market trading.

“Our analysis shows that the U.S. have lost their global advantage over the last few years,” says Loriana Pelizzon, Professor of finance at Ca’ Foscari University of Venice and Director of he Research Center SAFE ("Sustainable Architecture for Finance in Europe") at Goethe University Frankfurt. “Since 2015 other countries have emerged and occupied primary roles, increasing their chances of assuming central positions in the web of financial relations. At the same time, China is increasingly looking central.”

Monica Billio from Ca’ Foscari University of Venice, Andrew W. Lo from Massachusetts Institute of Technology, Mila Getmansky Sherman from University of Massachusetts Amherst, Loriana Pelizzon from Goethe University Frankfurt and Abalfazl Zareei from Stockholm University have analysed the yields of the New York Stock Exchange (NYSE) from 2012 to 2020, focusing on 12 country-specific ETF funds. “By using high-frequency data we have mapped out the web that defines the global financial system in a given moment. We can thus visualise the system’s reactions to ‘innovations’ such as trade wars, COVID-19 and other public health issues, obtaining a deeper understanding of global dynamics,” says Monica Billio.

The data shows that China, following the introduction of U.S. import duties in spring 2018, has at least reached the level of parity with the U.S. in terms of economic force. This situation has been strengthened since the outbreak of the COVID-19 pandemic in spring 2020. Due to political and epidemiological phenomena, European countries have become more relevant from a financial perspective, especially during the COVID-19 pandemic. The analysis included not only the U.S. and China, but also high-frequency ETF data about Australia, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland and the United Kingdom. According to Professors Billio and Pelizzon, “As a financial centre, Europe is so fragmented that it cannot compete with the emerging duopoly of the U.S. and China.” 

Researchers emphasise that China’s central role is a recent and potentially transitory phenomenon, which is changing with the current energy crisis. Only time will tell whether the global financial system is becoming bipolar or multipolar, and what the role of the U.S. in global financial dynamics will be.

“It is disturbing that one of the first indications that the financial system was becoming bipolar is the tension between the U.S. and China, at a time when scientific collaboration among nations was particularly important to contain COVID-19. The current situation is worrying and requires further analysis, so that we may understand whether we can avoid the ‘Thucydides' Trap’ — i.e., a tendency to engage in fight when an emerging country threatens to supplant the international hegemony of another country. As we change from a monopolar to a bipolar or multipolar world, we should try to avoid the escalation of tension. As individuals and as countries we must adapt to changing global conditions and global realignments in the post-COVID world,” say the researchers.