‘And yet, debates around US-China passive securities investment suffer from shortcomings similar to those inherent in the early debates about US-China bilateral FDI and VC: official data do not provide a clear picture for policymakers to understand the scope and patterns of two-way investment flows and stocks.’

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'The United States is China’s most important financial counterpart, save for Hong Kong. US markets have been critical to Chinese company fundraising.'

• 'We estimate there was as much as $3.3 trillion in US-China two-way equity and bond holdings (including securities held by central banks as reserves) at the end of 2020—nearly double the official figure of $1.8 trillion.'
• 'Official underreporting reflects the complex, multi-modal structures that are often used for international securities investments and the challenges statistical agencies have determining securities issuers’ and owners’ nationalities.'

'US holdings of Chinese securities neared $1.2 trillion at the end of 2020.'

• 'We estimate that US investors held $1.1 trillion in equity and $100 billion in debt securities issued by Chinese entities at the end of 2020.'
• 'That is about five times the holdings captured in official US data, which shows $211 billion in equity and $29 billion in debt holdings as of September 2020.'
• 'Most of the disparity is accounted for by firms from China using complex legal structures to issue shares out of tax havens that trade on US exchanges.'

‘Chinese holdings of US securities reached as much as $2.1 trillion.’

• ‘We estimate Chinese investors held $700 billion in equity and $1.4 trillion in debt securities issued by US entities at the end of 2020.’
• ‘In comparison, official US data report $240 billion of equity and $1.3 trillion of debt holdings as of September 2020.’
• ‘Most of this difference is accounted for by equity investments misclassified in official sources due to investor efforts to circumvent Beijing’s capital controls or the use of Hong Kong as an investment intermediary.’

‘Debt securities account for the bulk of Chinese holdings.’

• ‘These are primarily US Treasury securities and agency bonds held by China’s central bank as reserves.’

‘While US investors have tended to prefer ownership of Chinese equities (and been rewarded with higher relative returns), Chinese investors in US securities have preferred lending to the US government and US corporations at relatively low interest rates.’

• ‘They account for a low share of foreign ownership of US equities.’

‘While “active” investments via FDI and VC between the United States and China have been declining in recent years, “passive” financial investment flows have been on the upswing.’

• ‘Since MSCI first added Chinese onshore shares to its emerging market indices in 2018, pension funds and other large institutional investors from the United States have increased their holdings of Chinese onshore securities.’

‘Commercial appetite for greater two-way holdings of securities is clearly there, but the policy environment remains fragile.’

‘China’s leaders are aware of the fault lines in its domestic financial system and are anxious about short-term foreign capital flows injecting instability.’

• ‘Beijing has also demonstrated that it is not willing to let independent regulators operate, instead continuing to actively interfere in financial market dynamics and creating conflicts for fiduciary portfolio managers.’

‘In the US, concerns over national and economic security, accounting frauds, and broader geopolitical leverage have led to increased skepticism around financial integration with China. In a new era of US-China strategic competition, it is not surprising that bilateral securities investment has been caught in the broader “decoupling” debate in Washington.’

• ‘For example, government pension funds came under fierce scrutiny in the first half of 2020 as their prospective investment in Chinese companies was perceived to be against US security interests.’
• ‘Then in November, a Trump administration executive order banned US investment in certain Chinese firms linked to China’s military, including US-listed China Telecom, China Unicom, and China Mobile, which faced delisting from US exchanges in early 2021.’
• ‘And in the waning days of 2020, US lawmakers passed the “Holding Foreign Companies Accountable Act”, which would enforce stricter auditing compliance requirements on firms from China and force de-listings for companies unwilling to meet standards put on firms from China and force de-listings for companies unwilling to meet standards.

‘Steps like these have the potential to significantly deter US investment in the securities of companies from China, which already account for hundreds of billions of dollars of US investors’ global portfolios.’

• ‘And yet, debates around US-China passive securities investment suffer from shortcomings similar to those inherent in the early debates about US-China bilateral FDI and VC: official data do not provide a clear picture for policymakers to understand the scope and patterns of two-way investment flows and stocks.’