Page 412 - Special Topic Session (STS) - Volume 3

STS552 Carol C. Bertaut et al.
20 percent in the early 2000s. Holdings of EME debt account on average for
about 20 percent of U.S. holdings of foreign debt. On a nationality basis (2b),
holdings of foreign debt securities have risen less, reaching only about $2.4
trillion in 2017. The lower value largely reflects increased issuance by financing
arms of U.S. corporations established in offshore centers. Importantly, these
holdings of U.S.-parent bonds include substantial investments in asset-backed
securities issued out of Cayman Islands financing vehicles, including securities
backed by U.S. mortgages in the run-up to the financial crisis and more
recently, CLOs backed by U.S. syndicated loans. On the other hand, U.S.
holdings of the debt of some other countries and regions are substantially
understated. In particular, EME debt holdings are notably larger on a nationality
basis and have grown faster in recent years. By 2017, our estimate of U.S.
investment in EME debt securities on an ultimate parent basis is about 20
percent higher than under the residence-based statistics. Overall, we estimate
that offshore issuance currently distorts the geography of more than $700
billion in U.S. cross-border debt holdings.
We further estimate that of the roughly $1.2 trillion in U.S. holdings of
foreign fund shares, nearly $1 trillion is distorted in either asset type (that is,
where underlying securities are bonds or other assets other than equity), or
country of exposure, or both. Indeed, we estimate that at least half of these
U.S. investor holdings actually reflect exposure to the United States.
Combining our findings for U.S. cross-border investment in bonds,
common stock, and fund shares, we estimate that nearly $3.5 trillion of the
total $12.4 trillion in foreign portfolio securities held by U.S. investors in 2017
reflects exposures to countries other than as reported in the official U.S.
statistics. In contrast, in 2005, only a little over $800 billion of U.S. holdings of
foreign securities reflected investment in a different country of exposure.

4. Discussion and Conclusion
Our results can be generalized to draw conclusions about the extent of global
distortions. We estimate that roughly $10 trillion – about one-fourth – of the
stock of global cross-border portfolio investment is similarly distorted in the
current statistics. In particular, we estimate that global holdings of EME bonds
and equity in the CPIS are understated by roughly $1.5 trillion, reflecting both
corporate bonds issued via offshore financing arms and the growing market cap
of emerging market firms incorporated in offshore centers. Global holdings of
U.S. securities are also understated, owing to the incorporation of U.S.-based
multinationals in low-tax jurisdictions as well as the investments of funds located
in offshore centers. Securities holdings of other advanced economies, including
Germany, Italy, and Spain are also likely understated, because their firms
frequently issue debt securities via Luxembourg and Netherlands financing arms.

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