Order Code RL32462
CRS Report for Congress
Received through the CRS Web
Foreign Investment in U.S. Securities
Updated June 14, 2006
James K. Jackson
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

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Foreign Investment in U.S. Securities
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. Foreign
investors now hold more than 55% 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. It is uncertain, though, what types of events could
provoke a coordinated withdrawal from U.S. securities markets. Short of a financial
crisis, events that cause foreign investors to curtail or limit their purchases of U.S.
securities likely would complicate efforts to finance budget deficits in the current
environment without such foreign actions having an impact on U.S. interest rates,
domestic investment, and the long-term rate of growth. 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.
Economists generally attribute this rise in foreign investment to 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 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.
To date, the world economy has benefitted from the stimulus provided by the
nation’s combination of fiscal and monetary policies and trade deficit. Over the long
run, however, concerns are growing that U.S. economic policies and the
accompanying large deficit in its international trade accounts could have a negative
impact on global economic developments, especially for developing countries.
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. This report will be updated as events warrant.

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Contents
Capital Flows in the Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Capital Flows and the Dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Purchases and Sales of U.S. Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Purchases and Sales of U.S. Securities by Foreign Investors . . . . . . . . . . . 10
Treasury Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Corporate Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Corporate Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Economic Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
List of Figures
Figure 1. Foreign Official and Private Capital Inflows to the United States,
1995-2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Figure 2. Foreign Ownership Share of U.S. Publicly-Held Treasury Securities,
1995-2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Figure 3. Foreign Official and Private Purchases of U.S. Treasury Securities,
1995-2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
List of Tables
Table 1. Capital Inflows to the United States, 1995-2005 . . . . . . . . . . . . . . . . . . 2
Table 2. Flow of Funds of the U.S. Economy, 1995-2005 . . . . . . . . . . . . . . . . . . 3
Table 3. Saving and Investment in Selected Countries and Areas; 1990-1996
and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Table 4. Transactions in U.S. Securities, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Table 5. Foreign Transactions in U.S. Securities, 1999-2005 . . . . . . . . . . . . . . . 9
Table 6. Net Foreign Purchases of U.S. Securities by Foreigners . . . . . . . . . . . 11
Table 7. Net Foreign Purchases of Publicly-Traded U.S. Treasury Securities . . 12
Table 8. Net Foreign Purchases of U.S. Corporate Stocks . . . . . . . . . . . . . . . . . 13
Table 9. Net Foreign Purchases of U.S. Corporate Bonds . . . . . . . . . . . . . . . . . 14

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Foreign Investment in U.S. Securities
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. International
capital flows and international capital markets also give the owners of capital the
ability to reduce their risk by diversifying their investments. Foreign investors are
now major investors in U.S. corporate stocks and bonds and hold some 55% of the
publicly-held and -traded U.S. Treasury securities. These capital inflows help keep
U.S. interest rates below the level they would reach without them and allow the
Nation to spend beyond its current output, including financing its trade deficit. Some
observers, however, are concerned about the extent of these foreign holdings, because
they argue that this exposure increases the overall risks to the economy should
foreign investors decide to withdraw from the U.S. financial markets for political or
economic reasons.
Inflows of capital into the U.S. economy are not new. Such inflows, however,
grew sporadically over the last decade, as indicated in Table 1. In 1995, total foreign
capital inflows to the United States reached over $400 billion. As Figure 1 shows,
these capital inflows are comprised of official inflows, primarily foreign
governments’ purchases of U.S. Treasury securities, and private inflows comprised
of portfolio investment, which includes foreigners’ purchases of U.S. Treasury and
corporate securities, and financial liabilities, and direct investment in U.S. businesses
and real estate. By 2000, total foreign capital inflows totaled more than $1 trillion.
Such inflows were reduced in 2001 and 2002 as the growth rate of the U.S. economy
slowed, but surged to nearly $1.5 trillion in 2005 as the rate of economic growth
improved. Private capital inflows comprise the largest share of the total capital
inflows, with foreign purchases of corporate securities, stocks and bonds being the
main components of these inflows.
Capital flows are highly liquid, can respond abruptly to changes in economic
and financial conditions, and exercise a primary influence on exchange rates and
through those on global flows of goods and services. Economists generally attribute
this rise in foreign investment to 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 of the U.S. economy. These net capital inflows
(inflows net of outflows) bridge the gap in the United States between the amount of
credit demanded and the domestic supply of funds, likely keeping U.S. interest rates
below the level they would have reached without the foreign capital. These capital
inflows also allow the United States to spend beyond its means, including financing
its trade deficit, because foreigners are willing to lend to the United States in the form
of exchanging goods, represented by U.S. imports, for such U.S. assets as stocks,
bonds, and U.S. Treasury securities.

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CRS-2
Table 1. Capital Inflows to the United States, 1995-2005
(in billions of dollars)
Private assets
Official
Total
assets
Direct
Treasury Corporate
U.S.
Total
Other
investment securities securities currency
1995
$438.6
$109.9
$328.7
$57.8
$91.5
$77.2
$12.3
$89.8
1996
551.1
126.7
424.4
86.5
147.0
103.3
17.4
70.2
1997
706.8
19.0
687.8
105.6
130.4
161.4
24.8
265.5
1998
423.6
-19.9
443.5
179.0
28.6
156.3
16.6
62.9
1999
740.2
43.5
696.7
289.4
-44.5
298.8
22.4
130.5
2000
1,046.9
42.8
1,004.1
321.3
-70.0
459.9
5.3
287.6
2001
782.9
28.1
754.8
167.0
-14.4
393.9
23.8
184.5
2002
768.2
114.0
654.3
72.4
100.4
285.5
21.5
174.4
2003
829.2
248.6
580.6
39.9
113.4
251.0
16.6
159.7
2004
1,440.1
394.7
1,045.4
106.8
107.0
369.8
14.8
477.0
2005
1,474.1
240.8
1,233.7
119.9
142.4
512.9
15.6
442.5
Source: Department of Commerce, Survey of Current Business, March, 2006. Data for 2005 are
estimates based on third quarter data.
Figure 1. Foreign Official and Private Capital Inflows to the United
States, 1995-2005
$1,500
$1,400
$1,300
$1,200
rs
$1,100
$1,000
lla
o
$900
$800
f d
$700
s o
$600
n
$500
$400
illio
$300
B
$200
$100
$0
-$100
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Official assets
Private assets
Source: Department of Commerce

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CRS-3
Capital Flows in the Economy
Table 2 shows the flow of funds in the U.S. economy, or the sources and uses
of the net amount of funds in the economy by major sectors. Since the demand for
funds in the economy as a whole must equal the supply of funds, a deficit in one
sector must be offset by a surplus in another sector. Generally, the household sector,
or individuals, provides funds to the economy, because individuals save part of their
income, while the business sector uses those funds to invest in plant and equipment
that, in turn, serve as the building blocks for the production of additional goods and
services. The government sector (the combination of federal, state, and local
governments) can be either a supplier of funds or a user depending on whether the
sector is running a surplus or a deficit, respectively. The interplay within the
economy between saving and investment, or the supply and uses of funds, tends to
affect domestic interest rates, which move to equate the demand and supply of funds.
Shifts in the interest rate also tend to attract capital from abroad, denoted by the rest
of the world (ROW) in Table 2.
Table 2. Flow of Funds of the U.S. Economy, 1995-2005
(in billions of dollars)
Government
Households
Business
State and
ROW
Total
Federal
Local
1995
$133.6
$18.9
$-180.4
$0.0
$-180.4
$86.6
1996
175.2
19.8
-196.8
-1.2
-195.6
137.9
1997
47.4
-18.3
-116.6
-47.5
-69.1
219.6
1998
128.0
-45.7
64.8
48.8
16.0
75.0
1999
-132.7
-62.6
115.3
9.9
105.4
231.7
2000
-494.4
-82.9
233.4
35.4
198.0
485.4
2001
-117.8
33.3
-33.2
-33.7
0.5
399.0
2002
-217.1
8.5
-375.1
-95.6
-279.5
499.0
2003
-65.9
27.9
-557.5
-79.4
-478.1
557.4
2004
-287.6
-61.5
-520.6
-59.8
-460.8
582.9
2005
-609.1
-24.2
-447.6
-69.9
-377.7
795.3
Source: Board of Governors of the Federal Reserve System, Flow of Funds Accounts of the United
States, Flows and Outstandings First Quarter 2006, June 8, 2006.
As Table 2 indicates, from 1995 through 1998, the household sector ran a net
surplus, or provided net savings to the economy. The business sector also provided
net surplus funds through 1996, or businesses earned more in profits than they
invested. The government sector, primarily the federal government, experienced net
deficits, which decreased until 1998, when the federal government and state and local
governments experienced financial surpluses. Capital inflows from the rest of the
world rose and fell during this period, depending on the combination of household
saving, business sector saving and investment, and the extent of the deficit or surplus
in the government sector.

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CRS-4
Starting in 1999, the household sector began dissaving, as individuals spent
more than they earned. Part of this dissaving was offset by the government sector,
which experienced a surplus from 1998 to 2001. As a result of the large household
dissaving, however, the economy as a whole experienced a gap between domestic
saving and investment that was filled with large capital inflows. Those inflows were
particularly large in nominal terms from 2000 to 2005 and estimated to increase again
in 2006 as household dissaving continued and government sector surpluses turned
to historically large deficits in nominal terms. Such inflows have kept interest rates
below the level they would have reached without the inflows, but have put added
pressure on the international value of the dollar.
Foreign capital inflows augment domestic U.S. sources of capital, which, in
turn, keep U.S. interest rates lower than they would be without the foreign capital.
Indeed economists generally argue that it is this interplay between the demand for
and the supply of credit in the economy that drives the broad inflows and outflows
of capital. As U.S. demands for capital outstrip domestic sources of funds, domestic
interest rates rise relative to those abroad, which tends to draw capital away from
other countries to the United States.
The United States has also benefitted from a surplus of saving over investment
in many areas of the world that has provided a supply of funds and accommodated
the overall shortfall of saving in the country. This surplus of saving has been
available to the United States, because foreigners have remained willing to loan that
saving to the United States in the form of acquiring U.S. assets, which have
accommodated the growing current account deficits. Over the past decade, the
United States experienced a decline in its rate of saving and an increase in the rate
of domestic investment, as indicated in Table 3. The large increase in the Nation’s
current account deficit would not have been possible without the accommodating
inflows of foreign capital.
As Table 3 indicates, compared with the 1990-1996 period, U.S. saving in 2004
declined by 2% of gross domestic product (GDP), while investment increased by
1.5% of GDP. This shift toward greater investment relative to saving was
accommodated by an increase worldwide in saving relative to investment. Among
other advanced economies and the newly industrialized economies in Asia, both
saving and investment declined in 2004 relative to the 1990-1996 period, but
investment declined more as a share of GDP than did saving, so in relative terms
saving increased as a share of GDP. In the emerging developing economies and in
the developing economies of Asia, saving as a share of GDP increased faster than did
investment, which also increased in these areas.
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 businesses and real
estate (referred to as direct investment), and stocks, bonds, and U.S. Treasury
securities. Such inflows, however, put upward pressure on the dollar, which tends
to push up the price of U.S. exports relative to its imports and to reduce the overall
level of exports. Furthermore, foreign investment in the U.S. economy drains off
some of the income earned on the foreign-owned assets that otherwise would accrue
to the U.S. economy as foreign investors repatriate their earnings back home.

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CRS-5
Table 3. Saving and Investment in Selected Countries and
Areas; 1990-1996 and 2004
(Percentage of Gross Domestic Product)
Average,
Area/Country
2004
Change
1990-1996
World
Saving
22.9
24.9
2.0
Investment
24.0
24.6
0.6
United States
Saving
15.6
13.6
-2.0
Investment
18.1
19.6
1.5
Other Advanced Economies
Saving
23.7
22.7
-1.0
Investment
23.6
21.3
-2.3
Eurozone
Saving
21.4
20.9
-0.5
Investment
21.3
20.2
-1.1
Japan
Saving
32.4
27.6
-4.8
Investment
30.2
23.9
-6.3
Newly Industrialized Asian Economies
Saving
34.1
30.3
-2.8
Investment
32.6
24.9
-7.7
Emerging Developing Economies
Saving
25.2
31.5
6.3
Investment
27.5
29.2
1.7
Developing Asia
Saving
30.7
38.2
7.3
Investment
32.8
35.5
2.7
China
Saving
40.6
46.4
5.8
Investment
38.8
43.9
5.1
Source: The Budget and Economic Outlook, the Congressional Budget Office, August 2005. p. 39.
Some observers are particularly concerned about the long-term impact of the
U.S. position as a net international investment debtor on the pattern of U.S.
international income receipts and payments. In 2005, the United States received an
estimated $443 billion in income receipts on its investments abroad and paid out
$440 billion in income payments on foreign-owned assets in the United States for a
net surplus of $3 billion in income receipts, about one-tenth of that received in 2004.
Considering the overall negative balance of the U.S. net investment position, it is not
surprising that the net surplus of income receipts is falling. As the annual amount of
foreign investment in the U.S. economy continues to exceed the amount of U.S.
investment abroad, however, it seems inevitable that U.S. payments on foreign-
owned assets will rise to the point where they exceed U.S. receipts, possibly in 2006.

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CRS-6
A net outflow of income payments eventually will act as a drag on the national
economy as U.S. national income is reduced by the net amount of funds that are
channeled abroad to foreign investors.
Foreign capital inflows, while important, do not fully replace or compensate for
a lack of domestic sources of capital. Capital mobility has increased sharply over the
last twenty years, but economic analysis shows that a nation’s rate of capital
formation, or domestic investment, seems to be linked primarily to its domestic rate
of saving. This phenomenon was first presented in a paper published in1980 by
Martin Feldstein and Charles Horioka.1 The Feldstein-Horioka paper maintained that
despite the dramatic growth in capital flows between nations, international capital
mobility remains somewhat limited so that a nation’s rate of domestic investment is
linked to its domestic rate of saving.2
Capital Flows and the Dollar
Another aspect of capital mobility and capital inflows is the impact such capital
flows have on the international exchange value of the dollar. Demand for U.S.
assets, such as financial securities, translates into demand for the dollar, since U.S.
securities are denominated in dollars. As demand for the dollar rises or falls
according to overall demand for dollar-denominated assets, the value of the dollar
changes. These exchange rate changes, in turn, have secondary effects on the prices
of U.S. and foreign goods, which tend to alter the U.S. trade balance. At times,
foreign governments have moved aggressively in international capital markets to
acquire the dollar directly or to acquire Treasury securities in order to strengthen the
value of the dollar against particular currencies.
The dollar is heavily traded in financial markets around the globe and, at times,
plays the role of a global currency. Disruptions in this role have important
implications for the United States and for the smooth functioning of the international
financial system. This prominent role means that the exchange value of the dollar
often acts as a mechanism for transmitting economic and political news and events
across national borders. While such a role helps facilitate a broad range of
international economic and financial activities, it also means that the dollar’s
exchange value can vary greatly on a daily or weekly basis as it is buffeted by
international events. A recent survey by the world’s leading central banks indicate
1 Feldstein, Martin, and Charles Horioka, Domestic Saving and International Capital Flows,
The Economic Journal, June, 1980, p. 314-329; Feldstein, Martin, Aspects of Global
Economic Integration: Outlook for the Future. NBER Working Paper 7899, September
2000, p. 9-12.
2 Developments in capital markets have improved capital mobility since the Feldstein-
Horioka paper was published and have led some economists to question Feldstein and
Horioka’s conclusion concerning the lack of perfect capital mobility. (Ghosh, Atish R.,
International Capital Mobility Amongst the Major Industrialized Countries: Too Little or
Too Much?, The Economic Journal, January 1995, p. 107-128.) Indeed, some authors argue
that short-term capital flows among the major developed economies are highly liquid,
perhaps too liquid, and seem to be driven as much by short-term economic events and
speculation as they are by longer term economic trends.

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CRS-7
that the daily trading of foreign currencies totals more than $1.9 trillion, or more than
the annual amount of U.S. exports of goods and services. The data also indicate
that 90% of the global foreign exchange turnover is in U.S. dollars, substantially the
same as the share reported in a similar survey conducted in 2001.3
In the U.S. foreign exchange market, the value of the dollar is followed closely
by multinational firms, international banks, and investors who are attempting to
offset some of the inherent risks involved with foreign exchange trading. On a daily
basis, turnover in the U.S. foreign exchange market4 averages $461 billion; similar
transactions in the U.S. foreign exchange derivative markets5 averages $355 billion,
nearly double the amount reported in a similar survey conducted in 2001.6 Foreigners
also buy and sell U.S. corporate bonds and stocks and U.S. Treasury securities.
Foreigners now own 55% of the total amount of outstanding U.S. Treasury securities
that are publicly held and traded, as indicated in Figure 2 (above).7
Purchases and Sales of U.S. Securities
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 is published by the Treasury Department on a
monthly basis.8 As these data show in Table 4, foreign investors buy and sell large
amounts of U.S. financial assets, although the annual accumulation, though large in
dollar amounts, is relatively small compared with the large amounts of assets that are
traded annually. For instance, in 2005, foreigners purchased $20.7 trillion dollars in
U.S. financial assets and sold $19.9 trillion dollars in assets, for a net accumulation
of $868 billion in financial assets, or about 4% of the amount of assets that were
traded.
3 Triennial Central Bank Survey: Foreign Exchange and Derivatives Market Activity in
2004. Bank for International Settlement, March 2005. p. 1-2. A copy of the report is
available at [http://www.bis.org/publ/rpfx05t.pdf]. The 2001 survey is: Central Bank Survey
of Foreign Exchange and Derivatives Market Activity in April 2001: Preliminary Global
Data. Bank for International Settlement, October 2001.
4 Defined as foreign exchange transactions in the spot and forward exchange markets and
foreign exchange swaps.
5 Defined as transactions in foreign reserve accounts, interest rate swaps, cross currency
interest rate swaps, and foreign exchange and interest rate options.
6 The Foreign Exchange and Interest Rate Derivatives Markets Survey: Turnover in the
United States. The Federal Reserve Bank of New York, April, 2004. p. 1-2. A copy of the
report is available at [http://www.newyorkfed.org/pihome/triennial/fx_survey.pdf]
7 Treasury Bulletin, March 2006. Table OFS-2. p. 50.
8 These data are available through the World Wide Web at Treasury Department’s Treasury
International Capital (TIC) reporting site: [http://www.treas.gov/tic/]

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CRS-8
Figure 2. Foreign Ownership Share of U.S. Publicly-Held
Treasury Securities, 1995-2005
55
50
re 45
a
h 40
t S
35
ercen 30
P
25
20
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Year/Quarter
Source: Federal Reserve
Table 4. Transactions in U.S. Securities, 2005
(in billions of dollars)
Marketable U.S. Govt. Corporate Corporate Foreign
Foreign
Total
Treasury
Bonds
Bonds
Stocks
Bonds
Stocks
Securities
Gross Purchases by Foreigners
$20,745.3
$10,181.9
$1,126.0
$1,272.0
$4,463.3
$1,515.1
$2,187.0
Gross Sales by Foreigners
19,877.4
9,833.9
899.5
901.3
4,383.4
1,545.4
2,313.9
Net Purchases by Foreigners
867.9
348.0
226.4
370.8
79.9
-30.3
-126.9
Source: Treasury Department International Capital data system.
Marketable U.S. Treasury securities account for one of the largest shares of U.S.
securities that are traded by foreign investors, whether this is measured in terms of
the total amount of securities that are bought and sold, or in terms of the net annual
accumulation of financial assets. The low risk associated with these securities makes
them highly desired, especially during periods of market uncertainty. In 2005,
foreign trading in Treasury securities accounted for nearly half of all the U.S.
securities traded by foreign investors during that year, although the net amount of
Treasury securities that were accumulated were only slightly higher than the net
amount of corporate bonds accumulated during the year. Demand for Treasury

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CRS-9
securities remained strong even after the terrorist attacks of September 11, 2001,
when important elements of the U.S. financial system were temporarily shut down.9
Table 5 shows gross purchases, gross sales, and net sales of publicly traded U.S.
Treasury securities, corporate stocks, and corporate bonds over the seven-year period
1999 to 2005. At about $10 trillion, Treasury securities were the most heavily traded
of the three kinds of securities in 2005. From 1997 to 2001, foreign official and
private net acquisitions of Treasury securities plummeted as the federal government
used its budget surpluses to retire large amounts of securities, as indicated in Figure
3. The federal government’s budget deficits from 2002 through 2005, however,
provided new opportunities for foreign investors to build up their holdings of
Treasury securities.
Table 5. Foreign Transactions in U.S. Securities, 1999-2005
(in billions of dollars)
1999
2000
2001
2001
2003
2004
2005
U.S. Treasury Securities
Purchases
$4,288.1
$3,870.5
$5,267.7
$7,264.5
$8,001.5
$8,936.0 $10,181.9
Sales
4,298.1
3,924.5
5,249.2
7,144.5
7,737.9
8,584.0
9,833.9
Net
-10.0
-54.0
18.5
119.9
263.6
352.0
348.0
U.S. Corporate Stocks
Purchases
2,340.7
3,605.2
3,051.3
3,209.8
3,104.2
3,862.0
4,463.3
Sales
2,233.1
3,430.3
2,934.9
3,159.6
3,069.5
3,833.6
4,383.4
Net
107.5
174.9
116.4
50.2
34.7
28.5
79.9
U.S. Corporate Bonds
Purchases
368.7
479.5
741.0
820.7
979.9
1,171.4
1,272.0
Sales
208.3
295.3
519.1
638.4
714.2
861.9
901.3
Net
160.4
184.1
222.0
182.3
265.7
309.5
370.8
Source: Developed by CRS from the Treasury Department’s International Capital data system.
As Figure 3 indicates, foreign private purchases of Treasury securities turned
negative between 1998 and 2001 as such investors experienced net sales of Treasury
securities. By 2002, foreign private investors had returned to acquiring Treasury
securities, but the amount has remained relatively level at $100 billion per year from
2002 to 2005. In contrast, foreign official net acquisitions of Treasury securities
trended slightly upward between 1997 and 2002, but such net acquisitions more than
doubled over the 2002 to 2004 period, rising to $261 billion in 2004. In 2005,
though, official purchases of Treasury securities plummeted to about $100 billion and
were less than private purchases.
9 For additional information, see CRS Report RS21102, International Capital Flows
Following the September 11 Attacks, by James K. Jackson.

---

CRS-10
Figure 3. Foreign Official and Private Purchases of U.S. Treasury
Securities, 1995-2005
300
250
rs
Official
200
lla
o
150
f d
Private
100
s o
n
50
illio
0
B
-50
-100
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Year
Source: Department of Commerce
While the nominal amount of total purchases and sales of corporate bonds is
much lower than that for Treasury securities, the strong net accumulation of
corporate bonds rivals that of Treasury securities and likely reflects the attractiveness
of bonds as an alternative to Treasury securities and falling interest rates that marked
the period from 2000 through 2003. At times corporate bonds have served foreign
investors as an attractive alternative to Treasury securities. The price of a bond is
inversely related to the interest rate, so lowering interest rates raises the price, making
the bond more valuable. Net accumulations of corporate stocks has been the most
volatile of the three groups of securities over the decade. Low levels of stock
accumulation at the beginning and end of the period may well reflect economic
uncertainties and lower rates of national economic growth that characterized those
years. Higher levels of accumulation from 1999 to 2002 likely reflect the low levels
of accumulation of Treasury securities and the fast run-up in stocks prices that
marked that period. Foreign investors apparently had not regained their enthusiasm
for U.S. corporate stocks by year-end 2004, relative to their accumulation of Treasury
securities.
Purchases and Sales of U.S. Securities by Foreign Investors
Some foreign investors are more active in U.S. securities markets — U.S.
Treasury securities, U.S. corporate stocks and bonds — than are others. Over the
period from 1999 to 2005, foreign investors accumulated an estimated $4.1 trillion
in U.S. securities. As Table 6 indicates, the United Kingdom accumulated $1.1
trillion U.S. securities over the 1999-2005 period and could accumulate as much as
$178 billion in 2005, based on half-year data.
Large accumulations by British investors is not surprising given the long
historical involvement of British investors in the U.S. economy. Other foreign

---

CRS-11
investors have started acquiring U.S. securities more recently. Some, such as
Chinese investors, have moved rapidly to become major investors in some U.S.
securities markets. British investors are followed by Japanese investors as the second
largest foreign investors with $594 billion in U.S. securities during the 1999-2005
period, or about one-half the amount owned by British investors. During the seven
year period, Chinese investors were the third most active investors in U.S. securities,
with $363 billion in securities holdings. Following China, Canada ($155 billion),
Germany ($135 billion), Hong Kong ($127 billion), Mexico ($99 billion), South
Korea ($70 billion), and Singapore ($69 billion) are estimated to have accumulated
the largest amounts of U.S. securities over the 1999-2005 period.
Table 6. Net Foreign Purchases of U.S. Securities by Foreigners
(in billions of dollars)

1999
2000
2001
2002
2003
2004
2005
Total
Total
$360.1
$440.7
$501.2
$574.6
$652.4
$804.1
$770.6 $4,103.7
Total Europe
259.8
269.5
250.8
258.3
268.5
250.6
340.4
1,897.9
-France
3.4
3.8
8.5
2.4
0.4
-9.1
22.5
31.9
-Germany
21.2
29.2
21.1
0.0
10.0
16.8
36.9
135.3
-Italy
17.3
17.7
-2.8
2.3
-2.4
-2.2
-1.1
28.8
-Netherlands
14.8
2.7
9.3
-8.6
3.6
1.0
-5.7
17.0
-Sweden
3.0
7.4
3.1
4.9
2.9
-2.5
2.1
20.9
-Switzerland
12.6
-1.5
13.3
8.6
13.0
13.8
-8.9
50.8
-United Kingdom
168.8
136.1
155.4
191.9
150.4
149.5
178.5
1,130.6
Canada
12.1
14.8
16.9
6.8
32.4
28.2
44.1
155.3
Latin America
51.7
21.0
NA NA NA NA NA 72.8
-Mexico
1.6
9.3
8.3
10.2
10.8
29.8
28.9
98.9
Asia
34.6
128.6
155.7
203.4
236.6
369.9
201.5
1,330.3
-China
17.4
17.1
55.9
62.9
68.9
50.1
90.9
363.1
-Hong Kong
10.9
8.1
28.4
14.6
16.4
22.2
26.5
127.1
-Indonesia
2.1
0.7
-6.6
1.4
1.6
2.8
2.0
4.0
-Japan
-0.3
73.0
36.5
81.4
139.3
226.5
37.2
593.5
-Korea
9.9
5.0
0.3
13.0
12.2
18.2
11.1
69.8
-Malaysia
-0.8
0.1
2.5
0.9
-1.4
0.7
1.5
3.7
-Philippines
-1.3
1.3
1.1
-1.0
0.3
-0.6
0.5
0.3
-Singapore
-7.8
10.1
16.2
12.0
8.7
17.0
12.5
68.8
-Taiwan
-0.0
-3.4
11.0
17.4
-1.9
10.7
9.2
43.1
-Thailand
2.0
1.3
0.9
-1.4
-5.6
-0.2
10.3
7.1
-Australia
2.0
5.8
-1.7
10.2
4.3
-4.5
-12.0
4.0
Source: Developed by CRS from the Treasury Department’s International Capital data system.

---

CRS-12
Treasury Securities. As previously indicated, foreign investors are most
active in participating in the U.S. Treasury securities market. Over the seven-year
period, foreign investors acquired on net (purchases less sales) over one trillion
dollars in Treasury securities, as indicated in Table 7. Japan holds about $377
billion in U.S. publicly held and traded Treasury securities, more than the amount
held by all of the European countries. With $274 billion in Treasury securities, Great
Britain is the second largest holder. China, a recent participant in the U.S. Treasury
securities market has accumulated the third largest amount of these securities with
$131 billion in holdings. Nearly half of China’s holdings were acquired during 2002
and 2003. Canada ($50 billion) accumulated the next largest amount of Treasury
securities, followed by Korea ($40 billion).
Table 7. Net Foreign Purchases of Publicly-Traded U.S.
Treasury Securities
(in billions of dollars)
1999
2000
2001
2002
2003
2004
2005
Total
Total
$360.1 $440.7 $501.2
$574.6
$663.3
$763.6
$867.9 $4,171.4
Total Europe
259.8
269.5
250.8
258.3
281.6
239.4
451.6
2,010.9
-France
3.4
3.8
8.5
2.4
0.9
-9.1
26.3
36.3
-Germany
21.2
29.2
21.1
0.0
12.5
16.8
23.0
123.8
-Italy
17.3
17.7
-2.8
2.3
-2.4
-2.1
1.2
31.1
-Netherlands
14.8
2.7
9.3
-8.6
3.6
0.5
-7.0
15.2
-Sweden
3.0
7.4
3.1
4.9
2.9
-3.5
-7.9
9.9
-Switzerland
12.6
-1.5
13.3
8.6
13.0
13.7
-1.9
57.8
-United Kingdom
168.8
136.1
155.4
191.9
159.8
142.6
321.8
1,276.4
Canada
12.1
14.8
16.9
6.8
32.4
24.0
49.3
156.3
Latin America
51.7
21.0
25.8
21.3
26.0
38.4
20.0
204.3
-Mexico
1.6
9.3
8.3
10.2
10.8
28.2
18.4
86.7
Asia
34.6
128.6
155.7
203.4
234.4
364.7
221.5
1,343.0
-China
17.4
17.1
55.9
62.9
68.9
49.4
92.1
363.6
-Hong Kong
10.9
8.1
28.4
14.6
16.4
22.2
34.3
134.9
-Indonesia
2.1
0.7
-6.6
1.4
1.6
2.8
-1.4
0.6
-Japan
-0.3
73.0
36.5
81.4
137.1
226.5
46.5
600.5
-Korea
9.9
5.0
0.3
13.0
12.2
15.7
6.1
62.3
-Malaysia
-0.8
0.1
2.5
0.9
-1.4
-0.7
4.3
5.0
-Philippines
-1.3
1.3
1.1
-1.0
0.3
-0.6
1.3
1.1
-Singapore
-7.8
10.1
16.2
12.0
8.7
17.0
11.9
68.1
-Taiwan
-0.0
-3.4
11.0
17.4
-1.9
10.7
10.4
44.3
-Thailand
2.0
1.3
0.9
-1.4
-5.6
-0.2
7.6
4.5
-Australia
2.0
5.8
-1.7
10.2
4.3
-8.5
-8.6
3.4
Source: Developed by CRS from the Treasury Department’s International Capital data system.
Corporate Stocks. Foreign acquisitions of U.S. corporate stocks peaked in
2000, when foreign investors acquired $175 billion in corporate stocks, as indicated
in Table 8. By contrast, in 2005, foreign investors acquired $80 billion in such
stocks, up sharply from the $28.5 billion they acquired in 2004. In total, foreign
investors are estimated to have accumulated $592 billion in U.S. corporate stocks in
the 1999-2005 period, more than half of which were acquired during the frenetic

---

CRS-13
stock market boom of 1999 to 2001. British investors are by far the largest investors
in U.S. corporate stocks, with holdings acquired over the 1999-2005 period totaling
about $192 billion. Over the 1999-2005 period, Germany and Singapore were the
next two largest foreign investors in U.S. corporate stocks with such investments
estimated to total $43 billion and $40 billion, respectively. France ($30 billion), the
Netherlands ($28 billion), Japan ($28 billion), Italy ($20 billion), and Switzerland
($22 billion), are the next largest foreign investors in U.S. corporate stocks.
Table 8. Net Foreign Purchases of U.S. Corporate Stocks
(in billions of dollars)

1999
2000
2001
2002
2003
2004
2005
Total
Total
107.5
174.9
116.4
50.2
34.7
28.5
79.9
592.1
Total Europe
98.1
164.7
88.1
32.9
21.4
19.6
39.3
464.0
-France
3.8
5.7
5.9
2.1
6.2
-0.9
7.3
30.2
-Germany
13.4
31.8
8.4
-0.1
-3.8
-2.4
-3.8
43.5
-Italy
8.0
12.2
2.2
1.5
0.4
-1.7
-2.5
20.2
-Netherlands
8.1
4.9
10.9
4.3
0.0
1.7
-2.2
27.8
-Sweden
1.0
2.5
3.6
0.8
3.4
0.8
-0.4
11.7
-Switzerland
5.7
12.0
3.5
2.8
-2.1
-1.2
1.2
21.7
-United Kingdom
42.9
58.7
38.5
15.2
0.7
15.2
20.3
191.5
Canada
-0.3
6.0
11.0
8.2
11.7
1.3
16.4
54.2
Latin America
5.2
-17.8
0.3
1.0
0.7
-0.1
-0.0
-10.7
-Mexico
0.1
0.4
-0.7
0.5
-0.3
-0.2
-0.3
-0.5
Asia
3.4
21.7
22.5
21.4
2.8
6.2
9.6
87.6
-China
0.2
-0.1
0.0
0.2
-0.1
-0.3
-0.5
-0.6
-Hong Kong
-0.2
0.2
0.7
1.8
0.8
-0.8
0.9
3.4
-Indonesia
0.1
0.2
0.1
-0.0
0.1
0.0
-0.1
0.4
-Japan
5.7
2.1
6.8
12.3
-2.2
2.8
0.2
27.7
-Korea
-0.1
-0.2
-0.1
0.1
-0.0
-0.0
-0.1
-0.3
-Malaysia
-0.0
0.0
-0.1
-0.0
-0.0
-0.1
-0.2
-0.4
-Philippines
0.0
0.0
-0.0
-0.0
-0.0
0.0
0.1
0.1
-Singapore
-0.9
10.8
13.1
8.2
3.5
-1.7
7.1
40.2
-Taiwan
0.0
-0.1
0.3
0.3
0.3
-0.3
-0.4
0.0
-Thailand
0.0
-0.1
-0.0
0.0
-0.0
0.0
-0.0
-0.1
-Australia
0.9
1.4
0.1
3.0
-0.6
0.3
0.2
5.3
Source: Developed by CRS from the Treasury Department’s International Capital data system.
Corporate Bonds. As Table 9 indicates, foreign investors have shown
particular interest in U.S. corporate bonds since 1999 and accumulated about $1.7
trillion in such securities during the 1999-2005 period. A large share of these
accumulations is concentrated among a few large holders. For instance, British
investors hold nearly half of the foreign-owned U.S. corporate bonds, with an
estimated accumulation of $771 billion over the 1999-2005 period. Japanese
investors trail far behind their British counterparts, but acquired an estimated $108
billion in corporate bonds in the 1999-2005 period. China ($57 billion), Germany
($37 billion), France ($35 billion), Hong Kong ($32 billion), and Switzerland ($28
billion) are estimated to be the next largest foreign investors in U.S. corporate bonds
during the 1999-2005 period.

---

CRS-14
Table 9. Net Foreign Purchases of U.S. Corporate Bonds
(in billions of dollars)

1999
2000
2001
2002
2003
2004
2005
Total
Total
$160.4 $184.1
$222.0
$182.3
$265.7
$309.5
$370.8 $1,694.8
Total Europe
111.9
128.2
134.9
110.7
169.2
172.0
240.7
1,067.7
-France
1.6
2.2
3.0
2.6
4.0
7.6
14.4
35.4
-Germany
4.8
1.6
5.9
2.0
3.5
12.2
6.6
36.5
-Italy
0.5
0.3
0.2
0.2
2.0
0.7
-0.2
3.8
-Netherlands
0.1
-0.2
2.5
1.5
2.3
2.1
2.7
10.9
-Sweden
0.3
1.3
0.2
0.2
0.2
1.1
-0.4
2.9
-Switzerland
3.9
2.4
2.7
4.9
5.7
4.0
4.2
27.8
-United Kingdom
92.3
111.0
108.8
76.8
107.7
107.1
167.4
771.1
Canada
3.6
3.2
3.3
0.4
5.3
6.1
2.5
24.4
Latin America
31.2
29.7
4.8
5.0
6.6
19.9
8.3
105.4
-Mexico
1.6
1.1
1.3
2.2
3.0
15.1
1.5
25.8
Asia
11.2
22.2
27.6
26.4
27.8
60.1
71.5
246.8
-China
0.5
0.8
6.7
6.0
4.8
12.3
26.1
57.2
-Hong Kong
0.6
1.9
4.2
3.7
4.5
5.7
11.1
31.7
-Indonesia
-0.0
0.0
0.1
0.1
0.0
-0.1
0.0
0.2
-Japan
5.9
15.6
6.1
10.9
10.6
33.5
26.0
108.5
-Korea
0.1
-0.8
0.8
1.5
0.5
1.6
0.8
4.5
-Malaysia
0.0
0.1
0.1
0.1
0.0
0.1
1.3
1.7
-Philippines
0.0
0.2
0.2
0.1
0.1
0.2
0.1
1.0
-Singapore
3.6
1.3
5.4
1.3
3.0
4.2
1.0
19.8
-Taiwan
0.3
1.0
2.2
1.4
1.5
1.6
3.2
11.1
-Thailand
0.0
0.1
0.0
0.2
0.4
0.1
-0.0
0.8
-Australia
1.3
0.2
-0.1
3.0
0.4
1.4
5.5
11.7
Source: Developed by CRS from the Treasury Department’s International Capital data system.
Economic Implications
The large foreign accumulation of U.S. securities, particularly of U.S. Treasury
securities, has spurred some observers to consider the potential for a financial crisis.
Such a crisis could result from a coordinated withdrawal from U.S. financial markets
staged by foreign investors for economic or political reasons or a sharp drop in U.S.
equity prices as a result of an uncoordinated correction in markets prices. Congress
would likely find itself embroiled in any such 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. A coordinated
withdrawal from U.S. securities markets by foreign investors seems highly unlikely,
particularly since the vast majority of the investors are private entities that
presumably would find it difficult to coordinate a withdrawal.
It is uncertain what events could provoke a coordinated withdrawal from U.S.
securities markets. Some surmise that international concern over the ability of the
economy to service its large foreign debt could spur foreign investors to rein in their
purchases of U.S. financial assets, or that a loss of confidence in the ability of
national U.S. policymakers to conduct economic policies that are perceived abroad
as prudent and stabilizing could cause foreign investors to reassess their estimates of

---

CRS-15
the risks involved in holding dollar-denominated assets. In other cases, the
international linkages that connect national capital markets could be the conduit
through which events in one market are quickly spread to other markets and ignite
an abrupt, seemingly uncoordinated decline in equity prices. Such a market
correction, or a market panic, is expected to be short-lived, however, as investors
would likely move to take advantage of a drop in equity prices to acquire equities that
would be deemed to be temporarily undervalued. For instance, concerns in U.S.
capital markets in early June 2006 over prospects that a rise in consumer prices and
in the core inflation rate would push the Federal Reserve to raise key U.S. interest
rates sparked a drop in prices in U.S. capital and equity markets where inflation
concerns quickly spread to markets in Europe and Asia, where equity prices fell as
well.10
Short of a financial crisis, foreign capital inflows are playing an important role
in the economy. Such inflows bridge the gap between U.S. supplies and demands for
credit, thereby allowing the consumers and businesses to finance purchases at interest
rates that are lower than they would be without the capital inflows. Similarly, capital
inflows allow federal, state, and local governments to finance their budget deficits
at rates that are lower then they would be otherwise.
Capital inflows, however, are not without some cost to the economy. Foreign
ownership of U.S. securities means that foreigners receive any dividend or interest
payments that arise from those securities and that the economy experiences a transfer
of wealth associated with flows of goods and capital across borders. To the extent
that foreign investors repatriate their earnings, financial resources within the
economy are reduced. Increased foreign ownership of corporate stocks and bonds
also blurs the distinction between domestic and foreign-owned firms and may well
influence the way firms view trade, economic, and other types of public policies,
thereby affecting their relationships with Congress. In addition, as long as credit
demands in the economy outstrip domestic supplies of credit, foreign sources of
capital will be necessary to reduce pressure on U.S. interest rates. To the extent that
foreign investors become reluctant for any reason to continue to supply the economy
with capital, Congress could find it more difficult to finance a budget deficit by
drawing on domestic capital markets without the economy feeling the impact of such
borrowing.
The prospect of continued high levels of U.S. borrowing from the rest of the
world concerns various international organizations, such as the International
Monetary Fund (IMF) and the Organization for Economic Cooperation and
Development (OECD). In its April 2006 edition of World Economic Outlook,11 the
IMF highlighted the role U.S. economic policies played in the short run in stemming
a potentially serious economic slowdown in both the United States and the global
economy. Over the long run, however, the IMF argues that the saving-investment
imbalance in the U.S. economy threatens to affect global interest rates, productivity
10 Masters, Brooke A., Pondering the Bear Necessities, The Washington Post, June 7, 2006,
p. D1; Samuelson, Robert J., Global Capital On the Run, The Washington Post, June 14,
2006, p. A23.
11 World Economic Outlook, International Monetary Fund. Washington, DC, April 2006.

---

CRS-16
and income, and the growing deficits in the Nation’s already large current account
(exports, imports, and official capital flows) as a result of sustained high levels of
capital inflows. These effects could be especially serious for many of the developing
nations that rely on borrowing in global financial markets. Rising interest rates in the
United States could raise interest rates globally, which would raise borrowing costs
to developing countries. The IMF argues that, “over time changes in U.S. interest
rates feed through about one-to-one to foreign interest rates, implying that, in the
long run, the rest of the world is affected in a similar manner to the United States.”12
In a May 2004 publication,13 the OECD also questioned the feasibility of
sustaining large trade deficits given that the deficits are accommodated by foreign
investors who must remain willing to hold dollar-denominated assets. Foreign
investors essentially engage in cross-border risk management and will assess their
estimates of risk based on a broad range of factors, including the ability of the
economy to support a potentially increasing level of debt. According to the OECD,
“While the United States remains an attractive investment destination in many
respects, it is uncertain for how long foreigners will continue to accommodate debt
and equity claims against U.S. residents at the recent pace.”14
The highly evolved state of financial and economic linkages between the United
States and other foreign economies significantly reduces the prospects of a financial
collapse in the United States should foreigners attempt a coordinated withdrawal
from U.S. securities markets. A withdrawal by any single large foreign investor, or
a group of investors, from the U.S. financial markets at a time when those funds are
necessary for closing the gap between domestic demand and supply of funds would
likely have significant short-run effects. Any such coordinated attempt to withdraw
substantial amounts of funds abruptly from the U.S. markets would ordinarily be
noticed quickly by domestic and international financial markets. As investors
became aware of any large withdrawals, they likely would follow suit, driving the
prices of the asset down sharply and causing U.S. interest rates to rise abruptly. Any
investor selling assets at this point likely would experience a significant loss in the
value of those assets.
A similar downward spiral would occur over the short-run in the value of the
dollar if foreign investors attempted to convert their dollar holdings into foreign
currency. The financial and currency markets likely would adjust quickly to the
demands of foreign sellers of dollars by driving up the price of foreign currencies.
This likely would result in a decline in the value of the dollar and a further erosion
in the value of the assets of foreigners attempting to withdraw from the U.S. markets.
Over the long run, the economic and financial effects of a foreign withdrawal
from U.S. financial markets would be limited because those factors which allowed
12 World Economic Outlook, International Monetary Fund. Washington, DC, April 2004.
p. 69-70.
13 The Challenges of Narrowing the U.S. Current Account Deficit. OECD Economic
Outlook No. 75, May 2004. Available at [http://www.oecd.org/dataoecd/4/58/31920358.pdf]
14 Ibid., p. 31.

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CRS-17
foreigners to withdraw would attract other foreign investors to the U.S. markets. As
U.S. interest rates rose in response to the selling of securities, other investors likely
would be attracted to the higher returns of the assets, which would curb the decline
in the prices in the securities. Also, the rise in U.S. interest rates would attract
foreign capital, which would limit the rise in interest rates. A decline in the value of
the dollar against other currencies would also improve the international price
competitiveness of U.S. goods. As a result, U.S. exports would increase, likely
narrowing the gap between the earnings on U.S. exports and the amount Americans
spend on imports, thereby reducing the amount of foreign capital the U.S. economy
would need. Furthermore, those foreign investors who are successful in withdrawing
their funds from the U.S. markets would have to find suitable alternatives. Even if
they did not reinvest their finds in the United States, the infusion of capital back into
foreign capital markets likely would have spillover effects on the United States and
on U.S. securities.
It also seems unlikely that the Federal Reserve would sit on the sidelines
watching while the U.S. economy suffered a financial collapse. In the immediate
aftermath of the September 11, 2001 terrorist attacks, the U.S. financial and foreign
exchange market activities were slightly out of the norm, but actions by the Federal
Reserve and by other central banks helped head off a financial panic and a loss of
confidence by ensuring that the financial system was supplied with liquidity through
coordinated actions. Central bank coordination in times of crises is not uncommon,
but the speed with which the coordination was reached and the aggressiveness of the
banks to stem any loss of confidence in the financial system demonstrate the
recognition that national economies have become highly interconnected and that a
shock to one can create spillover effects onto other economies and markets.15

15 Jackson, International Capital Flows Following the September 11 Attacks.

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