BY DEREK SCISSORS
Key Points
- American investment in the People’s Republic of China probably exceeds $1 trillion, most occurring in the past six years. The vast majority is portfolio investment—holdings of bonds and, especially, small equities stakes. The amount is surprising because half or more is routed through offshore conduits such as the Cayman Islands.
- Investment anywhere near this magnitude undermines the view that the US is confronting China economically. Despite tariffs, the 2019 goods trade deficit was almost the same as in 2016. Over that period, Chinese money exited US Treasuries on a net basis. Meanwhile, more than $500 billion in American capital flowed into Chinese securities.
- One policy step is obvious: Require investors to disclose the true end-user of funds. If transparency is controversial, limit the disclosure to potentially harmful destinations such as China. Any restrictions on outbound investment, say in advanced technology, would call for a new body similar to the Committee on Foreign Investment in the United States.
Tough talk on China is politically popular. Tough action is costly and much less popular. One way to separate pretenders from those who want to protect American national interests is their willingness to at least determine the true amount of US dollars aiding General Secretary Xi Jinping’s regime.
This money does not stem from the bilateral trade deficit. While that does generate hard currency for Beijing, a large chunk goes to foreign firms based in China. Only part can be found in Chinese stock listings in the US, though enforcing disclosure laws here would be a welcome and overdue step.
Including but going well beyond those listings is the broad category of American portfolio investment—in bonds or companies at less than a 10 percent stake—in Chinese enterprises regardless of location. This can help fund technology firms that aspire to displace companies here, help suppress human rights, break US law, or are tied to the Chinese military or to the Chinese government itself.
The first policy failure is ignorance: The monitoring of American portfolio investment in China is deeply flawed. The full amount of portfolio investment, much less exactly what’s supported, is unknown. It may be near $1 trillion and definitely has been rising sharply over the past four years. A great deal of that may be working against US policy and principle. There is little point, for example, in “countering China by supporting our companies” or the like if US capital then supports Chinese companies in equal or larger amounts.
As is often the case with China, the most valuable step is thus boring rather than headline-grabbing. The true volume of American money, featuring that routed through offshore financial centers, must be tracked going forward, with back years also useful if possible. At least some final users of that money should be profiled. Once knowledge of the situation is in hand, sound decisions can be made on limits to capital flow, if any.
Derek Scissors is a resident scholar at the American Enterprise Institute.
