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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.
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 personal savings 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.
Economists generally attribute this rise in foreign investment to a number of factors, including:
“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 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. This report will
updated as events warrant.
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Capital Flows in the Economy ........................................................................................................ 3
Capital Flows and the Dollar........................................................................................................... 7
Purchases and Sales of U.S. Securities............................................................................................ 9
Purchases and Sales of U.S. Securities by Foreign Investors........................................................ 12
Treasury Securities.................................................................................................................. 14
Corporate Stocks ..................................................................................................................... 15
Corporate Bonds...................................................................................................................... 16
Major Foreign Holdings of U.S. Long-Term Securities.......................................................... 17
Economic Implications.................................................................................................................. 20
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Figure 1. Foreign Official and Private Capital Inflows to the United States, 1996-2007................ 2
Figure 2. Foreign Ownership Share of Publicly Held Treasury Securities, 1996-2008 .................. 9
Figure 3. Foreign Official and Private Purchases of U.S. Treasury Securities, 1996-2007........... 12
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Table 1. Capital Inflows to the United States, 1996-2007 ............................................................... 1
Table 2. Flow of Funds of the U.S. Economy, 1996-2008 .............................................................. 4
Table 3. Saving and Investment in Selected Countries and Areas; 1994-2001, 2002-2007,
and 2008 ....................................................................................................................................... 5
Table 4. Foreign Exchange Market Turnover .................................................................................. 7
Table 5. Transactions in Long-Term U.S. Securities, 2008 ........................................................... 10
Table 6. Foreign Transactions in U.S. Securities, 2002-2008 ........................................................11
Table 7. Net Foreign Purchases of U.S. Securities by Foreigners................................................. 13
Table 8. Net Foreign Purchases of Publicly Traded U.S. Treasury Securities............................... 14
Table 9. Net Foreign Purchases of U.S. Corporate Stocks ............................................................ 15
Table 10. Net Foreign Purchases of U.S. Corporate Bonds........................................................... 16
Table 11. Major Foreign Holdings of Long-Term U.S. Treasury Securities, or Cumulative
Amounts ..................................................................................................................................... 17
Table 12. Market Value of Foreign Holdings of U.S. Long-Term Securities, by Type of
Security ...................................................................................................................................... 19
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Author Contact Information .......................................................................................................... 23
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oreign capital inflows play an important role in the U.S. economy by bridging the gap
between domestic supplies of and demand for capital. The importance of these flows has
F been underscored by the financial crisis in 2008, when international capital markets
essentially shut down for a period of time. International capital flows and international capital
markets also generally give the owners of capital the ability to reduce their risk by diversifying
their investments. Oversight of these markets likely will change as a result of the financial crisis.
Foreign investors currently own more than 50% of the publicly held and traded U.S. Treasury
securities and hold large amounts of U.S. corporate stocks and bonds, although the value of these
assets has dropped markedly. Capital inflows help keep U.S. interest rates below the level they
would reach without them and have allowed the nation to spend beyond its current output,
including financing its trade deficit. Some observers have expressed concerns 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. At the same time, the funding requirements of the U.S. economy
may temper the criticism of some foreign investors, especially if capital flows should shrink and
U.S. funding requirements increase.
Inflows of capital into the U.S. economy are not new, although they grew sporadically over the
last decade, as indicated in Table 1. In 1996, total foreign capital inflows to the United States
reached over $551 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 grew to over $2.0
trillion in 2007 as the rate of economic growth improved. Private capital inflows comprise more
than three-fourths of the total capital inflows, with foreign purchases of corporate securities,
stocks and bonds being the main components of these inflows. In 2007, official inflows are
estimated to account for 17% of total foreign capital inflows, down from23.7% in 2006.
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 a number
of factors, including a “safe haven” effect during times of uncertainty; comparatively favorable
returns on investments relative to risk, 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.
Table 1. Capital Inflows to the United States, 1996-2007
(in billions of dollars)
Private assets
Total
Official
assets
Total Direct
Treasury
Corporate
U.S.
investment securities
securities
currency Other
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Private assets
Total
Official
assets
Total Direct
Treasury
Corporate
U.S.
investment securities
securities
currency Other
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 1,204.2 259.3
995.0
109.0
132.3
450.4
19.0
234.3
2006 1,859.6 440.3 1,419.3
180.6
-35.9
592.0
12.6
670.2
2007 2,057.7 411.1 1,646.6
237.5
156.8
573.9
10.7
689.1
Source: Weinberg, Douglas, and Renee M. Sauers, U.S. International Transactions, Third Quarter of 2008,
Survey of Current Business, January, 2009. p.36.
Figure 1. Foreign Official and Private Capital Inflows to the United States, 1996-2007
Source: Department of Commerce
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Table 2 shows the net flow of funds in the U.S. economy. The flow of funds accounts measure
financial flows across sectors of the economy, tracking funds as they move from those sectors that
supply the sources of capital through intermediaries to sectors that use the capital to acquire
physical and financial assets.1 The net flows show the overall financial position by sector,
whether that sector is a net supplier or a net user of financial capital in the economy. 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 net supplier of funds or a net
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.
As Table 2 indicates, from 1996 through 1998, the household sector ran a net surplus, or provided
net savings to the economy. The business sector also provided net surplus funds in 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.
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 2006 as
household dissaving continued and government sector surpluses turned to historically large
deficits in nominal terms.
Capital inflows in 2008 were $611 billion, about $160 billion less than that recorded in 2007. This
drop in capital inflows reflected a sharp reversal in the behavior of households from dissaving to
saving, an increase in business sector dissaving, and an increase in the deficits experienced by
state and local governments as the effects of the slowdown in the economy became more
pronounced. Households turned from a dissaving of $100 billion in 2007 to a net saving of $520
billion in 2008, reflecting the growing concern among households over the state of the economy.
The Federal Reserve reported that in 2008, households experienced a drop in their net worth of
more than $11 trillion, or about 20%.2
1 Teplin, Albert M., the U.S. Flows of Funds Accounts and Their Uses, Federal Reserve Bulletin, July 2001. p. 431-
441.
2 Board of Governors of the Federal Reserve System, Flow of Funds Accounts of the United States, Flows and
(continued...)
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Table 2. Flow of Funds of the U.S. Economy, 1996-2008
(in billions of dollars)
Government
Year Households Businesses
State and
Total
Local
Federal
ROW
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 -371.0
-82.9 252.5 54.5 198.0 476.3
2001 -494.4
-82.9 233.4 35.4 198.0 485.4
2002 -304.0
8.7 -382.6 -95.6 -287.0 501.7
2003 -79.3
30.3 -546.3 -70.2 -476.4 529.4
2004 -67.9 136.8 -469.1 -33.0 -436.1 530.0
2005 -477.5
-27.6 -367.6
7.2 -374.8 696.7
2006 -558.4 -182.1 -254.4 10.0 -264.4 835.2
2007 -100.1
77.0 -390.3 -55.3 -355.0 772.5
2008 520.2
-94.7 -790.8 -107.5 -683.3 611.3
Source: Board of Governors of the Federal Reserve System, Flow of Funds Accounts of the United States,
Flows and Outstandings Fourth Quarter 2008, March 13, 2009.
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. During periods of uncertainty, foreign investors
often turn to U.S. Treasury securities as a “safe haven” investment, as was the case at times in
2008 and into 2009.
The United States also has 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.
(...continued)
Outstandings, various issues.
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Table 3. Saving and Investment in Selected Countries and Areas; 1994-2001, 2002-
2007, and 2008
(Percentage of Gross Domestic Product)
Area/Country
Average,
Average,
1994-2001
2002-2007
2008 Change
World
Saving
22.1
22.4
24.0
1.6
Investment
22.4
22.2
23.5
1.3
United States
Saving
17.0
14.3
12.6
-1.7
Investment
19.6
19.2
17.5
-1.7
Other Advanced Economies
Saving
21.6
19.9
19.6
-0.3
Investment
21.8
20.7
20.7
0.1
Eurozone
Saving
21.4
21.5
21.8
0.3
Investment
21.0
20.8
22.2
1.4
Japan
Saving
29.3
27.1
27.4
0.3
Investment
26.9
23.4
23.4
0.0
Newly Industrialized Asian Economies
Saving
33.0
31.5
31.6
0.1
Investment
29.9
25.6
26.9
1.3
Emerging Developing Economies
Saving
24.2
30.3
33.7
3.4
Investment
25.0
27.2
29.7
2.5
Developing Asia
Saving
32.7
39.8
44.6
4.6
Investment
32.4
35.7
39.2
3.5
Middle East
Saving
25.5
37.7
47.4
9.7
Investment
22.4
23.7
24.5
0.8
Source: World Economic Outlook, International Monetary Fund, October 2008. p. 286-289.
As Table 3 indicates, compared with the 2002-2007 period, world saving in 2008 increased by
1.6% of gross domestic product (GDP), while investment increased by 1.3% of GDP. This shift
toward greater saving relative to investment made it possible for the United states to invest more
as a share of its GDP than its own saving could support through accommodating capital inflows.
Among other advanced economies saving in 2008 fell relative to investment. In the emerging
developing economies of Asia and the Middle East, saving increased faster than investment in
2008, which supplied the excess saving to the rest of the world. In the developing economies of
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Asia (which includes China), and the Middle East, saving as a share of GDP increased faster, and
in some cases much 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. In 2008, the value of many of those assets
dropped sharply, as the financial crisis eroded the value of financial assets and the economic
downturn reduced profits and the value of on-going businesses. 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.
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.3 In 2007, the United States received $818 billion in income receipts on its investments
abroad and paid out $736 billion in income payments on foreign-owned assets in the United
States for a net surplus of $82 billion in income receipts, up from the $52 billion net surplus in
income receipts experienced in 2006. 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
continue to rise relative to U.S. receipts. A net outflow of income payments acts 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 in 1980 by Martin Feldstein and Charles Horioka.4 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.5
3 CRS Report RL32964, The United States as a Net Debtor Nation: Overview of the International Investment Position,
by James K. Jackson.
4 Feldstein, Martin, and Charles Horioka, Domestic Saving and International Capital Flows, The Economic Journal,
June, 1980, pp. 314-329; Feldstein, Martin, Aspects of Global Economic Integration: Outlook for the Future. NBER
Working Paper 7899, September 2000, pp. 9-12.
5 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, pp. 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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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.
Also, 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.6 A
triennial survey of the world’s leading central banks conducted by the Bank for International
Settlements in April 2007 indicates that the daily trading of foreign currencies through traditional
foreign exchange markets7 totals more than $3.2 trillion, up sharply from the $1.9 trillion reported
in the previous survey conducted in 2004, as indicated in Table 4. In addition to the traditional
foreign exchange market, the over-the-counter (OTC)8 foreign exchange derivatives market
reported that daily turnover of interest rate and non-traditional foreign exchange derivatives
contracts reached $2.1 trillion in April 2007. The combined amount of $5.3 trillion for daily
foreign exchange trading in the traditional and OTC markets is more than three times the annual
amount of U.S. exports of goods and services. The data also indicate that 86.3% of the global
foreign exchange turnover is in U.S. dollars, slightly lower than the 88.7% share reported in a
similar survey conducted in 2004.9
Table 4. Foreign Exchange Market Turnover
Daily averages in April, in billions of U.S. dollars
1992 1995 1998 2001 2004 2007
Foreign Exchange Market Turnover
Instrument
Spot
transactions
$394 494 568 386 621 1,005
6 Samuelson, Robert J., Dangers in a Dollar on the Edge. The Washington Post, December 8, 2006. p. A39.
7 Traditional foreign exchange markets are organized exchanges which trade primarily in foreign exchange futures and
options contracts where the terms and condition of the contracts are standardized.
8 The over-the-counter foreign exchange derivatives market is an informal market consisting of dealers who custom-
tailor agreements to meet the specific needs regarding maturity, payments intervals or other terms that allow the
contracts to meet specific requirements for risk.
9 Triennial Central Bank Survey: Foreign Exchange and Derivatives Market Activity in 2007. Bank for International
Settlement, September 2007. pp. 1-2. A copy of the report is available at:http://www.bis.org/publ/rpfx07.pdf
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1992 1995 1998 2001 2004 2007
Outright
forwards
58 97 128 130 208 362
Foreign
exchange
swaps
324 546 734 656 944
1,714
Reporting
gaps
43 53 61 28 107 129
Total
“traditional”
turnover
820 1,190 1,490 1,200 1,880 3,210
Over the Counter Derivatives Market Turnover
Foreign exchange instruments
97
87
140
291
Interest rate instruments
265
489
1,025
2,090
Reporting
gaps
13 19 55 113
Total OTC turnover
375
575
1,220
2,090
Total market turnover
820 1,190 1,865 1,775 3,100 5,300
United States
Foreign
exchange
turnover
244 351 254 461 664
OTC derivatives turnover
90
135
355
607
Total
244 441 389 816 1,271
Source: Triennial Central Bank Survey: Foreign Exchange and Derivatives Market Activity in 2007. Bank for
International Settlement, September 2007.
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
market10 averages $664 billion; similar transactions in the U.S. foreign exchange derivative
markets11 averages $607 billion, nearly double the amount reported in a similar survey conducted
in 2004.12 Foreigners also buy and sell U.S. corporate bonds and stocks and U.S. Treasury
securities. Foreigners now own about 53% of the total amount of outstanding U.S. Treasury
securities that are publicly held and traded, as indicated in Figure 2.13
10 Defined as foreign exchange transactions in the spot and forward exchange markets and foreign exchange swaps. A
spot transaction is defined as a single transaction involving the exchange of two currencies at a rate agreed upon on the
date of the contract; a foreign exchange swap is a multi-part transaction which involves the exchange of two currencies
on a specified date at a rate agreed upon at the time of the conclusion of the contract and then a reverse exchange of the
same two currencies at a date further in the future at a rate generally different from the rate applied to the first
transaction.
11 Defined as transactions in foreign reserve accounts, interest rate swaps, cross currency interest rate swaps, and
foreign exchange and interest rate options. A currency swap commits two counterparties to exchange streams of
interest payments in different currencies for an agreed upon period of time and usually to exchange principal amounts
in different currencies as a pre-agreed exchange rate; a currency option conveys the right to buy or sell a currency with
another currency as a specified rate during a specified period.
12 The Foreign Exchange and Interest Rate Derivatives Markets: Turnover in the United States April 2007. The Federal
Reserve Bank of New York, April, 2004. pp. 1-2. A copy of the report is available at http://www.newyorkfed.org/
markets/triennial/fx_survey.pdf.
13 Treasury Bulletin, December 2007. Table OFS-2. p. 48.
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Figure 2. Foreign Ownership Share of Publicly Held Treasury Securities, 1996-2008
60
55
50
re
a
h
45
t S
40
ercen
P
35
30
25
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Year/Quarter
Source: Treasury Bulletin, U.S. Department of the Treasury
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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.14 These data represent cross-
border flows and positions between U.S. residents and foreign residents and include monthly data
on transactions in long-term securities, monthly and quarterly data on long- and short-term
securities reported by banks and securities brokers, annual position data on holdings of long-term
and short-term securities, and comprehensive benchmark surveys. Cross-border transactions
consist of only those transactions that involve both a U.S. seller and a foreign purchaser; they
exclude transactions between strictly U.S. buyers and sellers and foreign buyers and sellers. The
data also capture only those transactions that involve a defined panel of custodians (banks and
other depository institutions, securities brokers and dealers, end-investors, security issuers, and
nonfinancial institutions) above a certain threshold amount, specifically cross-border transactions
of at least $50 million per month. The custodial basis of the transactions means that some
attribution of data to specific countries may distort the holdings data, because some foreign
owners entrust the safekeeping of their securities to such financial centers as Belgium, the
Caribbean banking centers, Luxembourg, Switzerland, and the United Kingdom, which would
inflate the holdings of these custodians, rather than be attributed to the actual foreign owner. The
data in the following tables reflect monthly transactions in long-term securities.15
14 These data are available through the World Wide Web at Treasury Department’s Treasury International Capital
(TIC) reporting site: http://www.treas.gov/tic/.
15 Bertaut, Carol C., William L. Griever, and Ralph W. Tryon, Understanding U.S. Cross-Border Securities Data,
Federal Reserve Bulletin, 2006. p. A59-A75.
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As the data in Table 5 show, 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. For instance, in 2008 foreigners purchased $38
trillion dollars in U.S. financial assets and sold $37.8 trillion dollars in assets, for a net
accumulation of $453 billion in financial assets, or less than 2% of the amount of assets that were
traded.
Marketable U.S. Treasury securities generally account for one of the largest shares of U.S.
securities that are traded by foreign investors, whether 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 2008, foreign trading in Treasury securities accounted for half of
all the U.S. securities traded by foreign investors during the year, and the net amount of Treasury
securities that were accumulated comprise the largest category of securities that were
accumulated during the year, reflecting the impact the financial crisis and the economic recession
had on foreign investor’s appetite for other, more risky, types of investments, especially corporate
stocks. Demand for Treasury securities often remains strong during uncertain times as a “safe
haven” investment, including during the period following the terrorist attacks of September 11,
2001, when important elements of the U.S. financial system were temporarily shut down.16
Table 5. Transactions in Long-Term U.S. Securities, 2008
(in billions of dollars)
Marketable
Total
Treasury
U.S. Govt.
Corporate
Corporate
Foreign
Foreign
Securities
Bonds
Bonds
Stocks
Bonds
Stocks
Gross Purchases by Foreigners
$38,368.8 $14,627.5 $2,588.9 $1,467.1 $11,990.6 $2,263.6 $5,431.0
Gross Sales by Foreigners
37,854.2 14,311.5 2,626.7
1,373.5
11,949.9 2,181.6
5,410.9
Net Purchases by Foreigners
452.5 217.4
149.8
107.5
32.3
-14.1
-40.3
Source: Treasury Department International Capital data system, February 17, 2009.
Table 6 shows gross purchases, gross sales, and net sales of publicly traded long-term U.S.
Treasury securities, corporate stocks, and corporate bonds over the seven-year period 2001 to
2007. At over $15 trillion, Treasury securities were the most heavily traded of the three kinds of
securities in 2007. 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
16 For additional information, see CRS Report RS21102, International Capital Flows Following the September 11
Attacks, by James K. Jackson.
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through 2007, however, provided new opportunities for foreign investors to build up their
holdings of Treasury securities.
Table 6. Foreign Transactions in U.S. Securities, 2002-2008
(in billions of dollars)
2002 2003 2004 2005 2006 2007 2008
Treasury Securities
Purchases $7,264.5 $8,001.5 $8,936.0 $10,051.2 $10,957.9 $15,127.5 $14,627.5
Sales
7,144.5 7,737.9 8,584.0 9,713.1 10,762.4 14,929.6 14,311.5
Net
119.9 263.6 352.1 338.1 195.5 198.0 316.0
Corporate Stocks
Purchases 3,209.8 3,104.2 3,862.0 4,731.7 6,868.6 10,639.7 11,990.6
Sales
3,159.6 3,069.5 3,833.6 4,649.8 6,718.2 10,443.8 11,949.9
Net
50.2 34.7 28.5 82.0 150.4 195.5 40.8
Corporate Bonds
Purchases 820.7 979.9 1,171.4 1,277.0 1,678.5 1,913.3 1,467.1
Sales
638.4 714.2 861.9 904.8
1,167.7
1,520.0
1,373.5
Net
182.3 265.7 309.5 372.2 510.8 393.4 93.5
Source: Treasury Department International Capital data system, February 17, 2009.
As Figure 3 indicates, foreign private purchases of Treasury securities turned negative between
1998 and 2001 and again in 2006 as foreign private investors experienced net sales of Treasury
securities. From 2002 to 2006 and again in 2007, foreign private investors returned to acquiring
Treasury securities, but the amount they acquired remained relatively level at $100 billion per
year. In contrast, foreign official net acquisitions of Treasury securities trended slightly upward
between 2000 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 less than $100 billion and were less than private purchases. In 2006, private foreign
investors again reduced their net holdings of Treasury securities. This action was offset by a large
increase in acquisitions of Treasury securities by foreign governments, directed at least in part to
slow the decline in the international exchange value of the dollar. In 2007, foreign private
investors returned to acquiring treasury securities, with a net accumulation of $116 billion, while
net foreign official purchases dropped to about $60 billion.
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Figure 3. Foreign Official and Private Purchases of U.S. Treasury Securities,
1996-2007
Source: Department of Commerce
While the nominal amount of total purchases and sales of corporate bonds on an annual basis has
been much lower than that for Treasury securities, the strong net accumulation of corporate bonds
surpassed that of Treasury securities in 2007. This attraction to corporate bonds likely reflects the
attractiveness of bonds to foreign investors as an alternative to Treasury securities and as a hedge
against falling interest rates. The price of a bond is inversely related to the interest rate, so
lowering interest rates raises the price of a bond and makes the bond more valuable. Net
accumulations of corporate stocks has been the most volatile of the three groups of securities over
the decade. High levels of stock accumulation at the beginning and end of the period may well
reflect low levels of accumulation of Treasury securities and a rise in stocks prices that marked
those periods. Economic uncertainties and lower rates of national economic growth, however,
characterized the years during the middle part of the period.
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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 2002 to 2008, foreign
investors are estimated to have accumulated over $5 trillion in U.S. securities. As Table 7
indicates, the United Kingdom is estimated to have accumulated $1.8 trillion U.S. securities over
the 2002-2008 period.
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Table 7. Net Foreign Purchases of U.S. Securities by Foreigners
(in billions of dollars)
2002 2003 2004 2005 2006 2007 2008 Total
Total
$574.6 $663.3 $763.6 $839.1 $892.3 $776.6 $514.6 $5,024.1
Total Europe
258.3 279.6 239.4 428.8 378.1 328.3 272.0 2,184.5
-France
2.4 -0.4 -9.1 19.7 36.2 9.0 4.8 62.7
-Germany
0.0 12.5 16.8 23.8 -5.3 8.8 -1.2 55.4
-Italy
2.3 -2.4 -2.1 1.0 -3.2 -1.1 5.8 0.3
-Netherlands
-8.6 3.6 0.5 -6.7 4.2 14.0 -3.7 3.2
-Sweden
4.9 2.9 -3.5 -9.5 5.7 7.1 17.7 25.4
-Switzerland
8.6 13.0 13.7 -4.7 7.7 -8.9 14.6 44.1
-United
Kingdom
191.9 159.8 142.6 317.2 314.7 391.7 330.5 1,848.3
Canada
6.8 32.4 24.0 48.2 25.4 10.4 17.2 164.5
Latin America
92.2 108.5 149.4 146.1 217.2 156.8 -51.2 818.9
-Mexico
10.2 10.8 28.2 18.9 14.6 8.3 12.3 103.2
Asia
203.4 234.4 364.7 221.5 266.3 261.5 326.2 1,878.0
-China
62.9 68.9 49.4 89.2 117.3 122.5 142.4 652.5
-Hong
Kong
14.6 16.4 22.2 33.6 42.9 90.4 78.7 298.7
-Indonesia
1.4 1.6 2.8 -1.4 1.7 2.7 -6.2 2.5
-Japan
81.4 137.1 226.5 47.0 60.2 3.7 74.1 629.9
-Korea
13.0 12.2 15.7 6.1 14.5 6.2 -18.0 49.7
-Malaysia
0.9 -1.4 -0.7 4.5 -0.0 5.1 3.3 11.7
-Philippines
-1.0 0.3 -0.6 1.2 -0.7 4.8 -1.7 2.4
-Singapore
12.0 8.7 17.0 13.2 -1.5 10.2 7.6 67.1
-Taiwan
17.4 -1.9 10.7 10.7 4.9 8.0 11.8 61.7
-Thailand
-1.4 -5.6 -0.2 7.7 0.8 1.9 -1.4 1.8
-Australia
10.2 4.3 -8.5 -6.9 -2.5 6.1 -14.2 -11.5
Source: Developed by CRS from the Treasury Department’s International Capital data system. February 17,
2009.
A large accumulation by British investors is not surprising given the long historical involvement
of British investors in the U.S. economy. Other foreign 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 Chinese investors as
the second largest foreign investors with $652 billion in U.S. securities during the 2002-2008
period, or about one-third the amount owned by British investors. During the seven year period,
Japanese investors were the third most active investors in U.S. securities, with $630 billion in
securities holdings. Following Japan, Hong Kong ($299 billion), Canada ($164), Mexico ($103
billion), Singapore ($67 billion), Germany ($63 billion), and Taiwan ($62 billion) accumulated
the largest amounts of U.S. securities over the 2002-2008 period.
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As previously indicated, foreign investors are active participates in the U.S. Treasury securities
market. Over the seven-year period of 2002-2008, foreign investors acquired on net (purchases
less sales) about $1.8 trillion dollars in Treasury securities, as indicated in Table 8. The United
Kingdom acquired an estimated $800 billion in U.S. publicly held and traded Treasury securities
over the 2002-2008 period, followed by Japan, which accumulated $297 billion during the period.
China, a recent participant in the U.S. Treasury securities market accumulated the third largest
amount of these securities with $228 billion in holdings. Nearly half of China’s holdings were
acquired during 2005 and 2007. Canada ($64 billion) accumulated the next largest amount of
Treasury securities, followed by Hong Kong ($35 billion).
Table 8. Net Foreign Purchases of Publicly Traded U.S. Treasury Securities
(in billions of dollars)
2002 2003 2004 2005 2006 2007 2008 Total
Total
$119.9 $263.6 $352.1 $338.1 $195.5 $198.0 $316.0 $1,783.2
Total Europe
43.7 48.7 88.4 173.6 99.0 177.3 196.6 827.3
-France
-0.3 -7.0 -10.2 9.6 -1.6 -7.8 -15.4 -32.8
-Germany
-3.9 11.0 8.8 14.5 2.1 -3.5 0.7 29.8
-Italy
-0.3 -2.9 0.0 3.8 0.2 -1.5 0.8 0.1
-Netherlands
-17.0 0.4 -3.2 -6.1 0.7 1.5 -4.8 -28.5
-Sweden
2.9 0.4 3.2 1.8 0.7 2.2 -3.1 8.2
-Switzerland
-0.4 4.9 5.3 -4.9 -2.9 -2.6 1.2 0.5
-United
Kingdom
61.6 32.8 78.7 134.1 91.8 208.6 188.6 796.2
Canada
-5.2 10.4 16.1 21.5 14.2 -1.9 9.1 64.1
Latin America
20.0 17.1 33.5 68.4 12.0 88.5 23.2 262.8
-Mexico
4.0 5.3 8.4 9.8 -0.3 1.5 -7.1 21.5
Asia
55.7 181.1 214.8 68.3 68.7 -69.3 98.9 618.2
-China
24.1 30.4 18.9 37.4 40.6 -8.0 84.7 228.2
-Hong
Kong
-9.1 6.1 1.1 12.3 16.3 2.0 6.2 35.0
-Indonesia
0.8 0.7 1.2 1.2 2.1 4.5 -5.9 4.6
-Japan
30.5
146.5
166.4 -5.0 1.3 -48.7 6.1 297.1
-Korea
12.9 4.5 5.9 1.5 6.2 -17.9 -11.2 1.8
-Malaysia
0.9 -0.3 0.4 1.1 -2.4 0.4 -0.9 -0.9
-Philippines
0.2 0.4 0.1 1.1 -0.2 3.1 -2.1 2.6
-Singapore
-2.6 -1.4 3.5 2.4 -2.2 2.5 -7.0 -4.9
-Thailand
-1.9 -6.1 -0.4 8.4 1.3 0.8 -2.9 -0.8
-Australia
3.3 6.6 -2.2 0.1 -2.6 -1.4 -3.0 0.9
Source: Developed by CRS from the Treasury Department’s International Capital data system, February 17,
2009.
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Net foreign acquisitions of U.S. corporate stocks fell sharply in 2008, after reached a record high
in 2007, as foreign investors acquired $41 billion in corporate stocks, as indicated in Table 9.
This amount was the lowest amount of net acquisitions since 2004 and accounts for just one-
fourth the amount of stocks acquired in 2007. In total, foreign investors accumulated $582 billion
in U.S. corporate stocks in the 2002-2008 period, most of which was acquired in the 2006-2007
period. British investors are by far the largest investors in U.S. corporate stocks, with estimated
holdings acquired over the 2002-2008 period totaling $226 billion, reflecting the interdependence
between the U.S. and U.K. financial markets.. Over the 2002-2008 period, Canada and France
were the next two largest foreign acquirers of U.S. corporate stocks with such investments
estimated to total $69 billion and $62 billion, respectively. Hong Kong ($39 billion), Singapore
($23 billion) and the Netherlands ($16 billion), followed by Japan ($14 billion) and Switzerland
($10 billion) are the next largest foreign investors in U.S. corporate stocks.
Table 9. Net Foreign Purchases of U.S. Corporate Stocks
(in billions of dollars)
2002 2003 2004 2005 2006 2007 2008 Total
Total
$50.2 $34.7 $28.5 $82.0 $150.4 195.5 40.8 582.0
Total Europe
32.9 21.4 19.6 39.6 97.1 89.3 11.6 311.4
-France
2.1
6.2
-0.9
7.7
21.7
19.5
-7.2
49.2
-Germany
-0.1 -3.8 -2.4 -3.3 -8.0 0.6 -19.3 -36.3
-Italy
1.5 0.4 -1.7 -2.6 -2.3 -4.3 -1.8 -10.8
-Netherlands
4.3 0.0 1.7 -2.3 -5.4 6.9 -1.5 3.8
-Sweden
0.8
3.4
0.8
-0.5
0.7
0.3
5.1
10.5
-Switzerland
2.8
-2.1
-1.2
1.3
1.2
-3.0
5.4
4.4
-United Kingdom
15.2
0.7
15.2
19.8
75.8
69.5
29.9
226.0
Canada
8.2 11.7 1.3 16.5 11.8 8.1 7.4 65.0
Latin America
-15.4 -0.9 0.6 15.3 37.2 49.4 -35.0 51.2
-Mexico
0.5 -0.3 -0.2 -0.3 1.8 0.1 0.5 2.1
Asia
21.4 2.8 6.2 10.2 3.5 44.0 65.3 153.3
-China
0.2 -0.1 -0.3 -0.5 0.5 4.0 -0.7 3.0
-Hong Kong
1.8
0.8
-0.8
1.1
-0.5
35.4
27.5
65.3
-Indonesia
-0.0
0.1
0.0
-0.1
-0.0
-0.1
-0.0
-0.1
-Japan
12.3 -2.2 2.8 0.1 -0.7 -5.0 21.4 28.8
-Korea
0.1 -0.0 -0.0 -0.1 -0.1 0.1 2.8 2.7
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2002 2003 2004 2005 2006 2007 2008 Total
-Malaysia
-0.0 -0.0 -0.1 -0.2 -0.0 0.3 0.0 0.0
-Philippines
-0.0 -0.0 0.0 0.1 0.0 0.0 -0.0 0.1
-Singapore
8.2
3.5
-1.7
7.2
-4.5
-2.5
4.7
14.9
-Thailand
0.0
-0.0
0.0
-0.0
-0.0
-0.0
0.0
-0.1
-Australia
3.0 -0.6 0.3 0.1 1.0 4.8 0.3 9.0
Source: Developed by CRS from the Treasury Department’s International Capital data system. February 17,
2009.
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As Table 10 indicates, foreign investors have shown particular interest in U.S. corporate bonds
over the 2001-2007 period and accumulated about $2.2 trillion in such securities during the
seven-year 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 $1.0 trillion over the 2001-2007 period. Japanese
investors trail behind their British counterparts, but acquired an estimated $138 billion in
corporate bonds in the 2001-2007 period. China ($129 billion), France ($57 billion), Hong Kong
($57 billion), Switzerland ($34 billion), and Singapore ($28 billion), and are estimated to be the
next largest foreign investors in U.S. corporate bonds during the 2001-2007 period. Latin
American and Caribbean countries acquired $420 billion in U.S. corporate bonds over the 2001-
2007 period, slightly greater than the $409 billion acquired by countries in Asia.
Table 10. Net Foreign Purchases of U.S. Corporate Bonds
(in billions of dollars)
2002 2003 2004 2005 2006 2007 2008 Total
Total
$182.3 $265.7 $309.5 $372.2 $510.8 $393.4 $93.5 $2,127.5
Total Europe
110.7 169.2 172.0 241.7 316.1 207.5 -5.8 1,211.5
-France
2.6 4.0 7.6 13.2 22.1 4.3 -2.0 51.8
-Germany
2.0 3.5 12.2 6.5 -11.8 5.4 5.0 22.7
-Italy
0.2 2.0 0.7 -0.1 -0.5 -0.1 0.2 2.4
-Netherlands
1.5 2.3 2.1 2.8 3.2 -0.7
-0.4 10.8
-Sweden
0.2 0.2 1.1 -0.4 2.2 1.7
-0.5 4.5
-Switzerland
4.9 5.7 4.0 3.7 9.7 3.6
11.9 43.6
-United
Kingdom
76.8 107.7 107.1 168.9 253.8 209.0 31.9 955.1
Canada
0.4 5.3 6.1 2.2 8.1 12.3 7.2 41.6
Latin America
40.9 61.1 67.8 47.7 101.3 46.8 26.3 392.0
-Mexico
2.2 3.0 15.1 1.6 3.9 1.9 1.7 29.3
Asia
26.4 27.8 60.1 70.9 76.9 120.0 64.6 446.9
-China
6.0 4.8 12.3 26.1 31.2 41.7 29.6 151.6
-Hong
Kong
3.7 4.5 5.7 11.0 14.8 12.8 7.0 59.6
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2002 2003 2004 2005 2006 2007 2008 Total
-Indonesia
0.1 0.0 -0.1 0.0 0.2 0.4 0.0 0.7
-Japan
10.9 10.6 33.5 25.6 12.6 39.6 22.3 155.0
-Korea
1.5 0.5 1.6 0.8 3.2 11.3 0.6 19.5
-Malaysia
0.1 0.0 0.1 1.3 1.1 2.1 0.3 5.0
-Philippines
0.1 0.1 0.2 0.1 0.2 0.2 0.1 0.9
-Singapore
1.3 3.0 4.2 1.0 6.0 6.9
-1.1 21.4
-Thailand
0.2 0.4 0.1 -0.0 0.1 0.0 0.2 1.0
-Australia
3.0 0.4 1.4 6.3 7.2 5.0 0.3 23.7
Source: Developed by CRS from the Treasury Department’s International Capital data system, February 17,
2009.
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As Table 11 indicates, total foreign holdings, or the cumulative amount, of marketable and non-
marketable U.S. Treasury bills, bonds, and notes amounted to over $2.4 trillion at year-end 2007.
These holdings are divided into foreign private holdings designated by the individual country data
and holdings by foreign official institutions, which amounted to $1.5 trillion in 2007, or more
than the $882 billion accumulated by private investors. The data for foreign official institutions
consist of more than the foreign reserve asset holdings of central banks and of other foreign
government institutions involved in the formulation of international monetary policy. These
holdings also include the holdings of foreign government-sponsored investment funds and other
foreign government investment funds. Distinguishing between foreign private and official
holdings, however, can be difficult, because chains of intermediaries can obscure the country and
the type of foreign holder. As a result, foreign official holdings likely are undercounted in these
data.
With $571 billion in long-term Treasury securities holdings accumulated over the 2001-2007
period, Japan is the single largest holder of such securities. Over the same period, China had
accumulated $406 billion in such holdings by 2007. Between 2001 and 2007, China increased its
holdings of Treasury securities by more than five times. With $300 billion, the United Kingdom
ranked third in holdings behind China and held more than the $127 billion accumulated by the oil
exporting countries.17
Table 11. Major Foreign Holdings of Long-Term U.S. Treasury Securities, or
Cumulative Amounts
(in billions of dollars)
Country 2008 2007 2006 2005 2004 2003 2002
China
$727.4 $477.6 $396.9 $310.0 $222.9 $159.0 $118.4
Japan
626.0 579.9 622.9 670.0 689.9 550.8 378.1
17 Oil exporters include Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar,Saudi Arabia, the
United Arab Emirates, Algeria, Gabon, Libya, and Nigeria.
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Country 2008 2007 2006 2005 2004 2003 2002
Carib Banking
197.5 117.4 72.3 77.2 51.1 47.3 50.3
Centers
Oil
Exporters 186.2 137.9 110.2 78.2 62.1 42.6 49.6
United
130.9 157.9 92.6 146.0 95.8 82.2 80.8
Kingdom
Brazil
127.0 129.9 52.1 28.7 15.2 11.8 12.7
Russia
116.4 32.7 7.0
N.A N.A N.A N.A
Luxembourg 97.4 69.0 60.0 35.6 41.4 25.4 23.9
Hong
Kong 77.2 51.1 54.0 40.3 45.1 50.0 47.5
Taiwan
71.8 38.2 59.4 68.1 67.9 50.9 37.4
Switzerland 62.3 38.9 34.3 30.8 41.7 46.1 34.0
Germany
56.1 41.3 46.0 49.9 50.3 47.8 37.3
Ireland
54.3 18.7 11.6 19.7 16.2 14.9 7.0
Singapore
40.8 39.8 31.3 33.0 30.4 21.2 17.8
Mexico
34.8 34.2 34.9 35.0 32.8 27.4 24.9
Thailand
32.4 27.4 16.9 16.1 12.5 11.7 17.2
Korea
31.3 39.2 66.7 69.0 55.0 63.1 38.0
Turkey
30.8 25.6 23.0 17.4 12.0 15.7 13.5
India
29.2 14.9 14.6 N.A. 15.0 16.7 9.2
Norway
23.1 26.2 N.A. N.A. 22.6 5.2 N.A.
Israel
18.8 5.6 15.6 12.5 13.7 12.2 12.5
Egypt
17.2 10.4 N.A. N.A. N.A. N.A. N.A.
France
16.8 9.8 26.4 30.9 20.1 17.2 22.9
Italy
16.0 14.6 13.2 15.4 12.9 13.2 16.3
Belgium
15.9 13.2 16.3 17.0 17.0 14.4 13.0
Netherlands 15.4 15.2 20.7 15.7 16.0 12.3 13.0
Chile
15.2 8.7 N.A. N.A. N.A. N.A. N.A.
Sweden
12.7 13.7 12.0 16.3 17.0 9.9 12.3
Philippines
11.7 10.1 N.A. N.A. N.A. N.A. N.A.
Columbia
11.1 7.3 N.A. N.A. N.A. N.A. N.A.
All
Other
173.1 144.6 148.0 159.4 128.9 119.2 110.1
Grand
Total 3,076.9 2,351.1 2,103.0 2,033.9 1,849.3 1,523.1 1,235.6
Foreign
2,138.7 1,643.2 1,449.0 1,279.9 1,233.3 933.9 760.1
Official
Treasury
Bills 457.9 198.4 176.8 201.9 245.2 212.0 190.4
T-Bonds &
1,680.8 1,444.8 1,272.0 1,078.1 988.1 721.9 569.7
Notes
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Source: U.S. Department of the Treasury. Data represent estimated foreign holdings of U.S. Treasury
marketable and non-marketable bills, bonds, and notes. Data represent totals as of the end of December of the
year indicated.
Table 12 shows the relative shares of foreign holdings of total U.S. securities from 1974 to 2000.
These data indicate that between 1974 and 1984, there was little growth in the relative shares of
foreign holdings of various types of U.S. long-term securities. Since 1984, however, there has
been significant growth in the foreign share of all types of long-term securities, particularly in the
foreign share of long-term marketable U.S. Treasury securities, which grew from 13% of the total
amount outstanding to in 1984 to 35% of the total in 2000. In total, foreign investors hold 10% of
the combined value of outstanding U.S. corporate equity, corporate and municipal bonds,
marketable Treasury securities, and other U.S. government securities.
Table 12. Market Value of Foreign Holdings of U.S. Long-Term Securities, by Type of
Security
(in billions of dollars)
Total outstanding
Foreign owned
Percent foreign owned
Corporate equity
1974 $663
$25
3.8%
1978 1,012
48
4.7%
1984 1,899
105
5.5%
1989 4,212
275
6.5%
1994 7,183
398
5.5%
2000 23,038
1,711
7.4%
Corporate and municipal debts
1974 458
N.A.
N.A.
1978 680
7
1.0%
1984 1,149
31
2.7%
1989 2,400
190
7.9%
1994 3,342
276
8.3%
2000 5,404
712
13.2%
Marketable U.S. Treasury securities
1974 163
24
14.7%
1978 326
39
12.0%
1984 873
118
13.5%
1989 1,599
333
20.8%
1994 2,392
464
19.4%
2000 2,508
885
35.3%
U.S. government corporation and federally sponsored agency securities
1974 106
N.A.
N.A.
1978 188
5
2.7%
1984 529
13
2.5%
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Total outstanding
Foreign owned
Percent foreign owned
1989 1,267
48
3.8%
1994 2,199
107
4.9%
2000 3,968
257
6.4%
Combined market
1974 1,390
67
4.8%
1978 2,206
99
4.5%
1984 4,450
268
6.0%
1989 9,478
847
8.9%
1994 15,116
1,244
8.2%
2000 34,918
3,576
10.2%
Source: Griever, William L., Gary A. Lee, and Francis E. Warnock, The U.S. System for Measuring Cross-
Border Investment in Securities: A Primer with a Discussion of Recent Developments. Federal Reserve Bulletin,
October 2001. 639.
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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 market prices.18 Congress likely would 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 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
18 For a longer presentation of this topic, see CRS Report RL34319, Foreign Ownership of U.S. Financial Assets:
Implications of a Withdrawal, by James K. Jackson.
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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.19
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,20 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 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.”21
In a May 2004 publication,22 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
19 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.
20 World Economic Outlook, International Monetary Fund. Washington, DC, April 2006.
21 World Economic Outlook, International Monetary Fund. Washington, DC, April 2004. pp. 69-70.
22 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.
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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.”23
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 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
23 Ibid., p. 31.
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economies have become highly interconnected and that a shock to one can create spillover effects
onto other economies and markets.24
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James K. Jackson
Specialist in International Trade and Finance
jjackson@crs.loc.gov, 7-7751
24 Jackson, International Capital Flows Following the September 11 Attacks.
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