Tim cites the latest from the BEA which indicates that the U.S. holds $24.6 trillion in foreign assets while foreigners hold $31.6 trillion in our assets. So we have net debtor position equal $7 trillion at these recorded values. BEA’s Table 4.1 - Foreign Transactions in the National Income and Product Accounts – shows that we received $0.8 trillion in income on our holdings of foreign assets while foreigners receive only $0.6 trillion. What to make of this fact that the return on our holdings of foreign assets is 3.25% while foreigners receive only a 1.9% return? … If we updated their Dark Matter story using a 2% government bond rate representing current market conditions, the value of our holdings of foreign assets would be $40 trillion whereas the value of the U.S. assets held by foreigners would be only $10 trillion. In other words, they might argue that this is $17 trillion in Dark Matter.There are other explanations for this data including transfer pricing manipulation but let’s turn to China:
China’s global assets grew 14% last year to $5.94 trillion, driven largely by accumulation of reserves and outward FDI. Foreign assets in China expanded 18.5% to $3.97 trillion as economic growth and currency expectations pulled in foreign investment. China’s unfavorable balance sheet structure continues to worsen: Despite its hugely positive net foreign asset position of $1.97 trillion, China paid $60 billion of net interest to the world last year, due to lower rates of return on its overseas assets … despite this hugely positive NFA position, China remains a net payer of investment income to the world. In 2013, China received income payments of $168 billion on its assets overseas, but paid $228 billion in interest to foreignersSo China’s holding of foreign assets are $4 trillion but receive a 2.8% return while foreign holdings of Chinese assets are $2 trillion but receive a 5.7% return. Is this Chinese dark anti-matter? Discounting these income flows by 3%, their assets are worth only $5.6 trillion while their liabilities are worth $7.6 trillion turning a $2 trillion credit position on book to a $2 trillion debtor position in terms of market value. Joshua Aizenman, Yothin Jinjarak, Huanhuan Zheng note:
According to the State Administration of Foreign Exchange (SAFE), China’s external financial assets were about $6 trillion at the end of 2013, of which two-thirds were international reserves ($3.9 trillion), the outbound direct investment about 10%, securities investment about 4%, and other investment about 20%. The country’s external liability position was $4 trillion, out of which FDI in China was $2.35 trillion (60% of the total liability). The investment in securities and other aspects took up 10% and 30%, respectively.Their discussion was far ranging but within are transfer pricing implications worth further discussion.