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Fuzzy Figures On Our Foreign Foes

In April of 2011, the US Department of the Treasury released its Foreign Portfolio Holdings of US Securities as of June 30, 2010.    While this annual report is more thorough than the similarly-focused Monthly Report of Foreign Holdings issued by the Department of the Treasury, (as it should be considering the report is almost 10 months out of date by the time it is released and almost 20 months out of date upon final revision) this latest report illustrates how dangerously inaccurate the “operating” foreign investment figures are for most Americans, Congress and the investing public alike.  

In its previous monthly Foreign Investment Report, the US Department of the Treasury had estimated total US holdings by China at $892 billion – a number that had already raised concern in the US media regarding the size of China’s sovereign investment in the United States.  However, when compared to the $1.61 trillion figure released in the annual report, the realization that previous reports are off by almost one hundred percent is enough to raise more than a few red flags.  In fact, the discrepancies are large enough to question the reporting process altogether and whether or not foreign investment in the United States can reasonably be measured with any accuracy at all.  These questions therefore naturally extend to whether CFIUS review at any level can protect the United States economy from foreign investment transactions that are not publicly-declared takeovers like the failed Dubai Ports World and Unocal takeovers of the last decade.

One reason that any such total measurement of foreign investment in the US is difficult to attain stems from the fact that, with countries like China in particular, it’s nearly impossible to monitor the breadth of distribution for all of their sovereign investment.  For instance, in addition to China’s 5-year old $410 billion powerhouse Sovereign Wealth Fund known as the China Investment Corporation (“CIC”), China has even more foreign exchange assets – almost $570 billion more – in the State Agency for Foreign Exchange (“SAFE”).  This entity, though widely assumed as such, is not publicly declared to be a Sovereign Wealth Fund by the Chinese government like the CIC is.  

SAFE has essentially operated like an undeclared SWF by making “undisclosed” foreign investments throughout the world for the past 15 years.  Recently, however, the Chinese government has made some increasingly bold investments via SAFE; such as the 470 million Euros it spent for a 3% stake in Germany’s reinsurance giant Munich Re in August 2011.  Such large investment positions seem to indicate that China is conceding SAFE’s status as a Sovereign Wealth Fund instead of simply a foreign exchange asset depository.  In accordance with this investment behavior, SAFE is considered by the SWFI to be the world’s third largest Sovereign Wealth Fund; although the SWFI notes that it can only give a “best guess estimation” of SAFEs actual holdings because, notwithstanding recent high-profile investments, SAFE’s uber-secretive investment practices are hard to crack.  Despite all of these indicators – including SAFE’s determination as a Sovereign Wealth Fund by many leading private Sovereign Wealth Fund think tanks – the United States does not officially consider SAFE to be a Sovereign Wealth Fund and, accordingly, does not include such investments in their Foreign Investment data at the Department of the Treasury.  

Further clouding China’s foreign investment positions is the $2 trillion in foreign exchange reserves China has released as loans to support the activities of Chinese State Owned Enterprises (“SOEs”) in pursuit of China’s declared diplomatic and economic goals.  Such actions codify China’s commitment to the unique “State Capitalism” model that has served them so well over the past decade.  With China’s existing abilities to institutionally mask foreign investment in the Unites States just now being detected, the subsequent complications that may arise if China adopts individualized methods of investment masking – such as the use of depository receipts – infinitely compounds foreign investment tracking problems for both CFIUS and the US Treasury in the coming years.