Derek Scissors
Once a month, the Department of the Treasury publishes numbers for US investment in foreign stocks and bonds, with the Cayman Islands the largest recipient. This is laughable. Once a year, Treasury publishes numbers for destinations which actually have stock and bond markets, not transit points like the Caymans. The 2021 data just appeared. They show cumulative US portfolio investment of $950 billion in China, the fourth-largest foreign recipient. We have little idea what the money is doing.
Using the right numbers, the Caymans aren’t in the top 20. The US itself received by far the most – funds were round-tripped through off-shore financial centers then came back. The top foreign destination is the UK, followed by Canada and Japan. Four democratic nations which are defense treaty allies, then mainland China.
If Hong Kong is added, the total for the People’s Republic of China’s (PRC) rises to $1.18 trillion. This is in fact nearly a $200-billion drop from 2020. The drop is all in the value of American holdings of Chinese common stock. It didn’t occur because Americans withdrew money from the Chinese market, it occurred because share prices of popular Chinese stocks dropped.
The value of American investment in the PRC fell 17 percent in 2021. The most popular Chinese stock listed in the US is Alibaba’s and its share price dropped close to 50 percent in 2021. Also popular Pinduoduo fell more. Declines in Tencent and JD.com were larger than 17 percent. This weakness, in turn, was caused by intensified repression of China’s private sector toward the end of 2020. The Communist Party, not US investors or policies, undercut our investment in the PRC.
The data aren’t good enough to be certain but it may be that the bulk of the investment drop stemmed only from Alibaba. This isn’t the important money. The important money directly supports advanced technology, military-linked enterprises, and those helping violate human rights. American policy-makers don’t know if our financial support for those activities rose or fell in 2021 or the total dollars involved.
In 2019, all available data fraudulently treated offshore centers as final destinations. The recent once-a-year correction is a step forward, but publication is slow and infrequent. A quarterly series appearing with a six-month lag would be far better. More important, there needs to be a sector breakdown.
The Department of Commerce provides sectors for direct investment abroad. It’s certainly not the case that American portfolio managers don’t know where clients’ funds go. Money sent to the PRC may not end up where it’s supposed to, but we can know where it starts. This is absolutely necessary for good policy. How can we decide on outbound investment restrictions without knowing what we’re restricting?
Do consumer-oriented firms like Tencent receive 75 percent of our investment, or 35 percent? Either way, the remainder is hundreds of billions of dollars. Has it supported Chinese semiconductor research, surveillance technology, and genetics? Does it go to firms on the Entity List, a US government “blacklist” that doesn’t forbid investment (or even exports). Does it go to companies that look attractive because they use stolen American technology?
We have no answers. There’s a review process, poorly implemented, for exporting technology. There’s a good process for inbound investment, to protect technology. For outbound investment, forget review, we don’t know basic facts. Large financial firms say government intervention hurts markets. But lack of information is worse and they have successfully lobbied against China disclosure, convincing Treasury to publish bad information.
Other elements of the government are concerned about policy overreach. The administration raised outbound investment as an issue in mid-2021. Nineteen months later, it’s just about to act, any second now. Congress gave outbound investment a shot last year but backed away and also did nothing. Being concerned about overreach at the moment is refusing to start your car because you might have an accident.
It’s easy to apply restrictions to only a handful of countries, such as China and Russia. If data were available, it would be easy to apply restrictions to only a handful of industries. American politicians seem to trust Xi Jinping not to seriously harm our economy, kill his enemies at home, or threaten a major war. If that turns out to be wrong, keeping our eyes closed while American money supports the PRC is not going to look good on a resume.
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