Global Financial Integrity

 

Tax Havens Are the Biggest Foreign Investor in the United States… Not China

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There has been a lot of talk in recent years regarding the extent of China’s investment in the United States. Most of this has been centered on China’s admittedly large holdings of U.S. debt, but the fear has spilled over to other forms of investment as well. A 2012 report filed by the US-China Economic and Security Review Commission, an entity created by Congress in 2000, went as far as recommending that the Committee on Foreign Investment in the US be amended to add a required litmus test for Chinese investment, specifically. This test would make it mandatory to analyze the “net economic benefit” of all proposed Chinese investment in the United States before it is approved.

Being fair, a lot of this has to do with national security, with the rational that Chinese acquisitions of telecommunication companies (for example) might pose a threat to the “cyber and physical infrastructure services critical to maintaining the national defense, continuity of government, economic prosperity, and quality of life in the United States.” How much of this is legitimate I’m not sure of.

Still, does China own an outsized portion of US assets compared to the rest of the world? The short answer is no, not even close.

The real top foreign investors in the United States are – collectively – tax havens, not China.

As a group, tax havens held approximately $6.89 trillion in U.S. investments in 2012, almost 4 times as much as China’s $1.72 trillion. The Cayman Islands’ $2.45 trillion in US assets in 2012 alone was approximately $737 billion more than what China held – a difference the size of France’s position in the US.

Put in relative terms, this means that tax havens held around 29% of the total foreign investment in the U.S. in 2012. China held only 7%.

I’m going to take a step back so I can explain how I came up with that number. I’ve included all the links to the data and all my sources are listed at the bottom of this page. You can also download the data in each of the embedded graphs/tables by clicking “Get the data”.

The good news is that it’s all publically available and the U.S. is probably one of the better data reporters. It’s just a matter of aggregating it.

It’s also important to be forthright with how I define tax havens, and why it makes sense to treat them as a homologous group. Different researchers and organizations have used differing lists of tax havens. Here I use the IMF’s list of “offshore financial centers”, which is their more politically correct, less-offensive sounded word for tax havens. This list includes the most popular tax haven jurisdictions (the Cayman Islands, Luxembourg, Switzerland, etc.) but excludes places like the United Kingdom which many have argued is also a tax haven. See their list here (page 8): http://www.imf.org/external/np/pp/eng/2006/020806.pdf

Treating them collectively as a group isn’t an arbitrary decision either. Each tax havens tends to have different specialties (mutual funds in the Caymans, etc.), but they all follow a very similar model and have very similar characteristics.

Regarding the data used here: governments need to know how much cross-border investment is occurring between their country and the rest of the world. Statisticians have long categorized cross-border investment into 3… well now 4… different types. The fourth is a newer form of investment that statisticians (and more generally human beings) have had a tough time categorizing and explaining: financial derivatives.

The 4 types of investments are as follows:

  1. Foreign Direct Investment (FDI): mostly comprised of investment in a company which gives the investor “a significant degree of influence in the management” of said company. (cite). This will include a Chinese investor purchasing a US automaker (for example), but will not include a Chinese investor purchasing stock in the US automaker (in most cases). This data is readily available from the Coordinated Direct Investment Survey at cdis.imf.org.
  2. Portfolio Investment (PI): Comprised largely of cross-border investment in debt or equity securities. The good ol’ Chinese purchases of treasury debt will fall into this category, as well as most investment in US stock markets. This data is compiled on a monthly basis here (excel file): http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/slt1d_globl.csv
  3. Other Investment (OI): Mostly cash deposits held in US banks and loans. This data is also compiled monthly by Treasury (excel file): http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/lb_globl.csv
  4. Financial derivatives: you know… the scary financial instruments that were partly responsible for the recession. The US is one of the only countries that compile bilateral holdings of financial derivatives. You can get this data here: http://www.bea.gov/scb/pdf/2013/07%20July/0713_financial_derivatives.pdf

Of these four categories, portfolio investment is the largest component of foreign investment in the United States and is mostly driven by its huge market for long-term corporate stocks. Foreigners held an astounding $13.2 trillion in portfolio investment in 2012, 55% of the total of $24 trillion.

The UK is the biggest individual investor with $4.8 trillion in US investments, although $2.5 trillion of that are held as financial derivatives.

The Cayman Islands – yes an islands of 56,000 people – comes in second with $2.5 trillion.

Clarification needs to be made here regarding what is meant by the term “resident”. Taken literally, each “resident” of the Cayman Islands held $52 million in US investments in 2012… and that’s just US investment. The Caymans have huge holdings in other countries as well.

The legal definition of the term “resident”, for statistical purposes, means a national citizen as well an entity who conducts the majority of their economic activity in that location. This will include real, human Cayman nationals as well as shell corporations and other corporations who incorporate in these jurisdictions simply for tax purposes. A pretty safe bet is that the vast majority of this investment from the Caymans, particularly, is from “entities” that are incorporated there and not Cayman nationals.

This is the problem with so much investment ostensibly coming from tax havens: we have no way to know who truly owns these assets. It could be anyone from your run-of-the-mill tax avoiders to drug traffickers to terrorist financiers. Talk about a national security issue….

Here’s the totals for all countries with more than $100 billion of investment in the United States. You can sort it however. The asterisks indicate tax haven jurisidictions.

Sources:

IMF Balance of Payments Manual, 6th Edition (2008)

IMF Coordinated Direct Investment Survey (CDIS): cdis.imf.org

Treasury International Capital (TIC) System: http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/index.aspx

The Committee on Foreign Investment in the United States Congressional Research Report: http://www.fas.org/sgp/crs/natsec/RL33388.pdf