Trade growth is slowing and international financial flows are stuttering. Are we seeing the demise of globalisation?

I do not think so. While some aspects of globalisation are reversing — probably for good reasons — others are growing. We need to make sure the parts that are growing are safe and sustainable so that globalisation evolves in ways that direct capital to where it has the most benefit for the world economy.

Consider how cross-border financial flows have changed since the crisis of 2007-08. There had been a massive increase in capital flows driven especially by banks becoming more international. But then, as the instability of the system became painfully clear, market participants woke up to the risks and regulators left the era of the “light touch” behind.

International capital inflows are now only 1 per cent of global gross domestic product, six times less than the peak of 6 per cent in 2007.

While banking flows are de-globalising, market-based flows — such as foreign direct investment and portfolio flows — underwent a recovery post-crisis. This has made emerging markets’ sources of funding more diversified and — given that direct investment and debt securities typically have longer maturities than bank loans — probably less prone to reversal.

China features prominently on the changing landscape of financial globalisation, just as it did in the transformation of global supply chains after it joined the World Trade Organisation in 2001. Foreign assets of Chinese banks have more than doubled since 2009 and outward foreign direct investment increased about fourfold over the same period.

Nevertheless, Chinese financial integration still has a long way to go and will have to be managed carefully to ensure global financial stability. History teaches us that domestic institutional arrangements, including micro and macroprudential frameworks, must be one step ahead of easing restrictions on the movement of capital.

So what are the implications of these shifting patterns of global capital flows?

First, policymakers must ensure these new patterns of globalisation are safe. The Financial Stability Board is setting a good example with its work to improve the resilience and sustainability of cross-border banking flows. As international capital flows shifted to market-based finance, the policy focus turned to key non-banking activities such as asset management, to address vulnerabilities like liquidity mismatch in funds and leverage.

The FSB is also working with the International Monetary Fund and the Bank for International Settlements to draw lessons from the practical application of macroprudential policy frameworks and tools. This should help tackle domestic financial vulnerabilities that might be exacerbated by volatile capital flows.

Second, as the world becomes more integrated, the potential for spillovers increases and the need for global solutions grows accordingly. The financial reform agenda must be implemented consistently across jurisdictions.

In some areas there has been a proliferation of regional arrangements, in part because of dissatisfaction with global solutions. For example, regional financial institutions now have, in aggregate, more funding at their disposal than multilateral institutions, even though risks are more efficiently pooled at the level of the global safety net.

Globalisation is not reversing, therefore; it is changing. But as with earlier rounds of global integration, the downside risks need to be well-managed so that the upside benefits prevail. We have not always got that balance right in the past. It is vital we do better in the future if we are to sustain public support for an open world economy.