Friday, May 8, 2015

China’s Dark Anti-Matter?

I earlier noted an update to the old US “dark matter” parable:
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 foreigners
So 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.


marcel said...

I am vastly unlearned on this issue, but ISTM that it relates to a point that Krugman raised the day after your previous post: some (much?) of the dark matter relates to differences across countries in stock market prices. Is this wrong?

ProGrowthLiberal said...

Krugman noted one valuation issue. But he looked only at the details of the balance sheet. The dark matter puzzle involves the income statement. The US is a debtor nation but has positive net income whereas China is a creditor nation with negative net income. Valuation issues may be part of this but there are a host of possible explanations.