Page 411 - Special Topic Session (STS) - Volume 3

STS552 Carol C. Bertaut et al.
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location of operations for firms that are not included in the MSCI. For bonds,
we additionally rely on Moody’s information about the parent company and, for
asset-backed securities, about the underlying assets to map holdings of
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corporate bonds to an “ultimate parent” or nationality basis. Finally, we draw
implications for distortions created by U.S. cross-border fund shares using
“mirror data” on the portfolio assets of two countries that account for the
majority of U.S. cross-border fund share holdings, the Cayman Islands and
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Luxembourg.

3. Results
Figures 1a and 1b show the evolution of U.S. holdings of foreign common
stock according to standard residence-based country attribution (1a) and
nationality-based attribution (1b). A growing source of distortion arises from
firms that the MSCI classifies as “U.S.” but are legally incorporated outside the
United States. This share has grown from about 7 percent of foreign common
stock held in 2005 to about 13 percent (nearly $1 trillion) by 2017, partly as a
result of the corporate inversions noted above. U.S. holdings of EME equity are
also considerably larger by MSCI definitions, in large part reflecting the
classification to EMEs of large Chinese firms incorporated in offshore centers.
Overall, we find that by 2017, roughly $1.8 trillion–nearly a fourth–of U.S.
holdings of foreign common stock is attributed by official statistics to a country
different from the country assigned by MSCI.
Figures 2a and 2b similarly show the evolution of the U.S. cross-border
bond portfolio. On a residence basis (2a), U.S. holdings of foreign-issued debt
securities have risen from $557 billion in 2001 to about $2.8 trillion in 2017. By
2017, roughly 30 percent of these (nearly $850 billion) consisted of securities
issued out of offshore centers or low-tax jurisdictions, an increase from roughly

7 We assign the ultimate MSCI designation for securities of companies that have not yet been
included in the MSCI. For example, we assign any U.S. holdings of Chinese firms such as Alibaba,
Tencent, and Baidu (incorporated in the Cayman Islands) to China for years prior to 2015,
although these firms were not included in the MSCI China/Emerging Markets indexes until 2015.
8 Although sovereign bonds of many countries are issued as international debt securities, their
country assignment will not be distorted in residence-based statistics the same way that
corporate bonds are, because they are not issued via subsidiaries legally incorporated in
offshore financial centers.
9 Beginning in December 2015, the Cayman Islands submission to the CPIS includes securities
holdings of resident funds. Cross-border portfolio holdings of the Cayman Islands were roughly
$1.9 trillion as of December 2017, with a little over $1 trillion in debt securities and the remainder
in cross-border equity. About 70 percent of these holdings are of U.S. securities, 15 percent are
securities issued by other advanced economies, and the residual 15 percent those of all other
countries, including EMEs. Similar information on assets of non-monetary Luxembourg funds is
available from the Central Bank of Luxembourg. Securities held by these funds were more than
$4 trillion at end-2017. Nearly a quarter of the underlying assets held by these funds are U.S.
securities and another quarter are securities issued by non-euro area countries including EMEs.
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