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Institute for Workplace Studies----------------- Professor Samuel B. Bacharach
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16 East 34th Street, 4th floor---------------------- Stuart Basefsky
New York, NY 10016 -------------------------------Director, IWS News Bureau
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Congressional Research Service (CRS)

 

Foreign Investment in U.S. Securities

James K. Jackson, Specialist in International Trade and Finance

June 22, 2010

http://opencrs.com/document/RL32462/2010-06-22/download/1013/

[full-text, 27 pages]

 

Summary

Foreign capital inflows are playing an important role in the U.S. economy by bridging the gap

between domestic supplies of and demand for capital. In 2008, as the financial crisis and global

economic downturn unfolded, foreign investors looked to U.S. Treasury securities as a “safe

haven” investment, while they sharply reduced their net purchases of corporate stocks and bonds.

In 2009, foreign capital inflows continued to drop as private investors sharply retrenched, while

official purchases of U.S. Treasury securities by foreign governments rose sharply. Foreign

investors now hold more than 50% of the publicly held and traded U.S. Treasury securities. The

large foreign accumulation of U.S. securities has spurred some observers to argue that this large

foreign presence in U.S. financial markets increases the risk of a financial crisis, whether as a

result of the uncoordinated actions of market participants or by a coordinated withdrawal from

U.S. financial markets by foreign investors for economic or political reasons.

 

Congress likely would find itself embroiled in any such financial crisis through its direct role in

conducting fiscal policy and in its indirect role in the conduct of monetary policy through its

supervisory responsibility over the Federal Reserve. Such a coordinated withdrawal seems highly

unlikely, particularly since the vast majority of the investors are private entities that presumably

would find it difficult to coordinate a withdrawal. The financial crisis and economic downturn,

however, have sharply reduced the value of the assets foreign investors acquired, which may

make them more hesitant in the future to invest in certain types of securities. As a result of the

financial crisis of 2008, foreign investors curtailed their purchases of corporate securities, a

phenomenon that was not unique to the United States. In a sense, the slowdown in the U.S.

economy and rise in the personal rate of saving have eased somewhat the need for foreign

investment. The importance of capital inflows may well change as the federal government’s

budget deficits rise over the course of the economic downturn.. This report analyzes the extent of

foreign portfolio investment in the U.S. economy and assesses the economic conditions that are

attracting such investment and the impact such investments are having on the economy.

 

Over the course of the recent recession, foreign investors have often favored dollar-denominated

investments due to a number of factors, including the evaluation that such investments are a “safe

haven” investment during times of uncertainty; comparatively favorable returns on investments, a

surplus of saving in other areas of the world, the well-developed U.S. financial system, and the

overall stability and relative rate of growth of the U.S. economy. Capital inflows also allow the

United States to finance its trade deficit because foreigners are willing to lend to the United States

in the form of exchanging the sale of goods, represented by U.S. imports, for such U.S. assets as

U.S. businesses and real estate, stocks, bonds, and U.S. Treasury securities. Despite

improvements in capital mobility, foreign capital inflows do not fully replace or compensate for a

lack of domestic sources of capital. Economic analysis shows that a nation’s rate of capital

formation, or domestic investment, seems to have been linked primarily to its domestic rate of

saving.

 

This report relies on a comprehensive set of data on capital flows, represented by purchases and

sales of U.S. government securities and U.S. and foreign corporate stocks, bonds, into and out of

the United States, that is reported by the Treasury Department on a monthly basis.

 

Contents

Capital Flows in the Economy.....................................................................................................3

Capital Flows and the Dollar .......................................................................................................7

Purchases and Sales of U.S. Securities ......................................................................................10

Purchases and Sales of U.S. Securities by Foreign Investors......................................................13

Treasury Securities..............................................................................................................15

Corporate Stocks.................................................................................................................16

Corporate Bonds .................................................................................................................17

Major Foreign Holdings of U.S. Long-Term Securities........................................................18

Economic Implications..............................................................................................................21

 

Figures

Figure 1. Foreign Official and Private Capital Inflows to the United States, 1994-2009................3

Figure 2. Foreign Ownership Share of Publicly Held Treasury Securities, 2000-2010 ................10

Figure 3. Foreign Official and Private Purchases of U.S. Treasury Securities, 1997-2009...........13

 

Tables

Table 1. Capital Inflows of the United States, 1996-2009.............................................................2

Table 2. Flow of Funds of the U.S. Economy, 1996-2009 ............................................................4

Table 3. Saving and Investment in Selected Countries and Areas; 1996-2003, 2004-2008, and 2009 .....................5

Table 4. Foreign Exchange Market Turnover ...............................................................................8

Table 5. Transactions in Long-Term U.S. Securities, 2009 ......................................................... 11

Table 6. Foreign Transactions in U.S. Securities, 2003-2009......................................................12

Table 7. Net Purchases of U.S. Securities by Foreigners ............................................................14

Table 8. Net Foreign Purchases of Publicly Traded U.S. Treasury Securities ..............................15

Table 9. Net Foreign Purchases of U.S. Corporate Stocks ..........................................................16

Table 10. Net Foreign Purchases of U.S. Corporate Bonds.........................................................17

Table 11. Major Foreign Holdings, or Cumulative Amounts, of Long-Term U.S. Treasury Securities ..........................18

Table 12. Market Value of Foreign Holdings of U.S. Long-Term Securities, by Type of Security ...........................20

 

Contacts

Author Contact Information ......................................................................................................24

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