Foreign capital finds a harbor in US -- and a potential to rock the boat
Boston — Foreign money is talking loudly in the United States nowadays. It used to be thought that US capital markets, by far the largest in the world, were for all practical purposes immune from foreign money influences. That's no longer the case.
The increasing interdependence of national economies, the new wealth of the members of the Organization of Petroleum Exporting Countries (OPEC), and the increased international flows of capital today have a significant mark on domestic capital markets.
International capital holdings, concludes David G. Hartman, Harvard University economics professor, in a paper written for the National Bureau of Economic Research, "Would seem to be neither so large that they dominate the US capital market, nor so small that they can be ignored in models of the US capital market."
Indeed, in one area, Professor Hartman found that international effects on the long-term new-issue corporate bond rate in the US to be "highly significant." If American firms had not been making so many direct investments abroad (investments in plants, equipment, and offices in foreign nations owned at least 10 percent by US residents), the yield on corporate bonds in the US might have been as much as 98 basis points (0.98 percent) lower in 1979, his research shows.
Looking at another capital market, a new study by the Securities Industry Association finds that foreigners have sharply boosted their impact on the US stock market. Swiss, Canadians, Britons, West Germans, Arabs, and other Nationalities now control 10 to 15 percent of common stock, or as much as $176 billion worth, the industry group estimates.
In 1980, the study reckons, foreigners bought and sold $75 billion of stock. The pace continued at $18.5 billion in the first quarter of this year. Their net purchases in those three months -- their additions to their portfolios -- came to $1.7 billion, close to the all-time record net buying peak of $2.1 billion in the first quarter of 1980.
Harvard's Professor Hartman also offers considerable evidence to show that "international capital transactions are sizable relative to the US market." Here are some of his findings: A. US government securities.
Foreign holdings of US government debt grew from a level of just over $10 billion at the beginning of 1970 to almost $138 billion by the end of 1978. That investment amounted to about 20.23 percent of such bonds outstanding in 1978.
this growth, says Hartman, indicates the desirability of US government obligations as a relatively safe store of value and of the role of the US dollar as an official reserve currency. OPEC money has been a particularly large factor.
Some massive changes in foreign holdings are explained by the needs of foreign central banks to obtain or invest US dollars as they attempt to maintain or change the value of their currencies by buying or selling these dollars in the foreign exchange markets.
Professor Hartman concludes: "The foreign presence in the US Government bond market appears, from casual observation, to be sufficiently large that the possibility of a significant effect on the economy cannot be ruled out. Not only do foreign holdings make up a sizable fraction of the government debt outstanding, but also the net foreign purchases on a year-to-year basis are large and volatile enough to drive a considerable wedge between the federal budget deficit and the domestic deficit finance required."
For instance, in 1971 a federal deficit of $22 billion was offset by even greater US government borrowing from foreign sources. In 1975 the record federal deficit of more than $70 billion was almost 90 percent financed at home. By contrast, the $74 billion combined deficit for the years 1977 and 1978 was almost 80 percent financed by foreigners. Then, during the first quarter of 1979 foreign goverments, in attempting to stabilize their exchange rates against a rising dollar, sold almost $18 billion of US government obligations.
Last year foreigners acquired $12.4 billion of US Treasuries and their net purchases have continued at an even faster pace in the first part of 1981, according to Salomon Brothers. B. Direct investment.
US firms had invested a total of $174.5 billion abroad by the end of 1979. Such investments, where the US parent has control of the foreign enterprise, have long been the most sizable American long-term capital outflow. These investments often have been attacked as undesirable exports of jobs or technology.
Foreign direct investment in the US stood at only $46.7 billion at the end of 1979.
However, foreign investments in both directions have grown so rapidly as to become of considerably greater significance. From the beginning of 1970 until the end of 1979, US direct investment abroad grew from a level of 14.2 percent. In the same period, foreign direct investment in the US more than tripled as a percentage of total US corporate equity: from 1.3 percent to 4.2 percent.
Commenting on the concern of some Americans with the rapid growth in foreign control over US production, Hartman says: "Viewed in relation to US capital employed abroad, the level of foreign direct investment in the US does not seem so alarming." C. Portfolio investment in private securities.
Foreigners held some $60.1 billion of private US securities in their portfolios at the end of 1979. US holdings of foreign securities at the same date only slightly exceeded this amount at $61.7 billion.
However, the composition of the assets held differs markedly. Just over 80 percent of the foreign portfolio consists of the stock of US firms. Nearly 80 percent of the US holdings are foreign bonds.
1. Stocks. The Securities Industry Association figures apparently make the Treasury statistics used by Professor Hartman on foreign purchases of US equity out of date.
US portfolio holdings of foreign equity stood at about $13.8 billion at the end of 1979. The average rate of growth in US dollar ownership of foreign stock since 1965 has been about 5 percent per year, most of this growth resulting from increases in the dollar value of foreign stocks held rather than in net new purchases.
2. Bonds. US holdings of foreign bonds reached about $48 billion at the end of 1979, up from just over $3 billion 20 years earlier. This growth has accelerated greatly in the past five years. Specifically, US holdings of foreign bonds grew at annual rates of about 5 percent from 1965 through 1969, 11 percent from 1970-73, and 18 percent from 1974-79.
Professor Hartman figures the most obvious explanation for this acceleration in US purchases is the end of the interest equalization tax in early 1974 -- an excise tax that started out ranging from 1 to 15 percent depending on time to maturity. This tax was imposed to improve the US balance-of-payments position by President Kennedy.
The level of US holdings of foreign bonds stood, at the end of 1979, at nearly 12 percent of the value of US private domestic bonds outstanding. Net purchases of foreign bonds were nearly 17 percent as large in the 1976-1979 period as net new issues of US corporate bonds. "summary," writes Hartman, "transactions in foreign bonds would seem to neither dominaet the US market nor be sufficiently small that their effects could be safely ignored."
As for foreign investment in US private bonds, this is only about one-quarter as large as either US holdings of foreign private bonds or foreign holdings of US stock. Recently, however, members of the OPEC have stepped up their purchases of bonds privately placed by US corporations and other corporate bonds. Such purchases amounted to over $3.7 billion in 1977, amounting to more than 10 percent of US firms' net issues. So, though foreign purchases do not dominate the market, they are not in consequential, Hartman says.