Destinations for portfolio investment in emerging economies: China is different
Since the 2008-2009 global financial crisis, international investors have shown increased appetite for bonds issued by emerging market and developing economies….
Since the 2008-2009 global financial crisis, international investors have shown increased appetite for bonds issued by emerging market and developing economies. The stock of bonds issued by their governments and corporations in the hands of international investors has risen from less than $1 trillion in 2009 to $3.5 trillion in 2021, according to our External Wealth of Nations database. Of particular note is the boom in international holdings of bonds issued by China, which were negligible in 2009 ($9 billion) and reached $788 billion at the end of 2021.
In a paper with Katharina Bergant and Martin Schmitz, we show that the largest holders of Chinese debt are Asian financial centers (especially Hong Kong and Singapore) and foreign central banks, including importantly Russia’s (chart).
The largest international investors—the United States and the euro area—play instead a much more modest role, even though their holdings have been increasing rapidly as well. The increase in foreign purchases of Chinese bonds—notable even as a share of rapidly rising Chinese GDP—reflect both the increased use of the Chinese renminbi as a reserve currency, following its inclusion in the International Monetary Fund’s SDR basket in 2016, and the increase in purchases of Chinese equities and bonds following China’s inclusion in major international indices in 2019.[1] Clearly holdings of international financial centers such as Hong Kong and Singapore will likely be on behalf of investors from other countries, and hence uncertainty remains on the nationality of the ultimate holders of these bonds.
In contrast, the majority of investment in bonds issued by countries such as Mexico, Brazil, Indonesia, Poland, and the Gulf states comes from advanced economies, with the euro area being the largest investor, followed by the United States (chart).
These holdings rose rapidly during the decade 2009-2019 and are higher in absolute terms ($2.7 trillion at end-2021, of which $2 trillion tracked by the CPIS) and as a share of the recipient countries’ GDP compared to holdings in China.
Using detailed information on sectors holding portfolio instruments including bonds shows the differences in the investors who hold Chinese bonds and those who hold bonds issued by other EMs. Estimates for holdings as of December of 2020 (chart) suggest that the largest investors are foreign central banks, followed by banks, while the shares held by investment funds and banks are broadly similar.[2]
In contrast, investment funds are by far the largest sector investing in bonds issued by EMs excluding China, followed by insurance companies and pension funds and then banks (chart).
The much lower presence of foreign central banks indicates that virtually the entirety of global foreign exchange reserves is held in advanced economies’ currencies or in renminbi.[3]
Offshore finance
Chinese corporate entities also issue a large amount of bonds through affiliates domiciled in financial centers (such as the Cayman Islands or the British Virgin Islands).[4] In general, firms choose this strategy for tax and regulatory reasons. For China, an additional incentive is the presence of capital controls that affect foreign access to local bond markets. The funds raised by these offshore affiliates are then channeled to the parent company via intercompany loans. Corporate bonds issued through offshore affiliates are mostly denominated in foreign currency (with a primary role for U.S. dollar issues), while bonds issued directly by onshore entities and held by nonresidents include government bonds, which are at least in part denominated in the domestic currency of the issuing country.
The stock of outstanding bonds issued through offshore affiliates exceeded $1 trillion as of December 2020, according to data from the Bank of International Settlements. This amount exceeds total foreign holdings of bonds issued directly by domestic Chinese entities, and is an order of magnitude larger than the amounts issued by Brazil, Russia, South Africa, and Gulf states (chart).
It is difficult to establish general patterns of ownership for those bonds—in surveys such as the CPIS, they are classified as bonds issued by, say, the Cayman Islands rather than China. However, data for the U.S. (as described in Bertaut, Bressler, and Curcuru, 2019) and the euro area (as shown in our paper) suggest that their holdings of bonds issued by offshore affiliates of Chinese corporate entities are broadly of the same order of magnitude as holdings of bonds issued directly by domestic Chinese entities, and therefore represent a relatively modest fraction of China’s offshore-issued bonds.[5] This relatively small share may have to do with the characteristics of the bonds, including the extent of disclosure required by major U.S. and European investment vehicles. It also raises the question of who the main investors in those instruments are, and whether they include resident Chinese investors as well.
In conclusion, foreign investors have been increasing their exposure to emerging market bonds over the past decade. At the same time, the investor base for Chinese bonds held overseas appears to be quite different from the one of the other main issuers, such as Brazil, Indonesia, Mexico, and Poland. Specifically, the weight of U.S. and euro area investors among all foreign investors is much smaller for China, where instead investors from Asia as well as foreign central banks (notably the Central Bank of Russia) play a larger role. Chinese corporate entities also issue a large amount of bonds through offshore affiliates. While it is difficult to establish general patterns of ownership for those bonds, existing data suggest that U.S. and euro area investors do not play a major role in that market either.
The evidence presented in this blog is a small slice of the work in the underlying paper. There we provide stylized facts on nonresident holdings of emerging market bonds and analyze the determinants of euro area investors’ purchases of such securities, using a comprehensive security-level dataset to track net transactions by euro area residents of individual bonds issued by emerging market economies. Euro area investors show a preference for euro-denominated and sovereign EM bonds. Net purchases tend to be higher when the macroeconomic outlook of the respective EMs improves, and U.S. monetary policy is loosened. Conversely, euro area investors—in particular, investment funds—sell emerging market debt when global financial stress is high. In a case study for the BRICS countries, we find that euro area investors treat EM bonds issued through offshore affiliates differently from onshore securities, likely reflecting differences in currency composition. The sell-offs of EM debt in 2018 as well as during the COVID-19 shock only affected securities issued directly by domestic entities, primarily in local currency, while euro area investors held on to securities issued through offshore affiliates.
[1] To link countries investing in EM bonds—and their investor sectors—to destination countries, we make use of data from the International Monetary Fund’s Coordinated Portfolio Investment Survey (CPIS) to help identify the residence of investors in emerging market securities. Countries participating to the survey, conducted annually between 2001 and 2012 and every 6 months thereafter, provide a breakdown by geographical destination of their holdings of foreign equities and bonds. The survey also provides the same breakdown for a group including participating central banks and international organizations. Aggregating investor holdings for each destination country enables us to construct a “derived” measure of bonds held by nonresidents (“portfolio debt liabilities” in balance of payments statistics). These derived liabilities are typically a bit lower than the corresponding liabilities reported by the destination country, given the incomplete investor coverage by the survey. At the same time, the participation to the survey of almost all large investor countries makes the data quite representative. [2] Data for China rely on reported or estimated sectoral breakdowns for about 85 percent of total holdings identified in the CPIS. The calculation requires several assumptions. The most consequential one for China concerns Hong Kong (the largest investor in Chinese bonds). For that economy we don’t have a sectoral breakdown of its portfolio investment by country in CPIS, but we do have an aggregate breakdown of its total portfolio investment in bonds in its reported IIP. We apply the ratios derived from that breakdown to holdings in each individual destination country, including China. In particular, that breakdown indicates that deposit money banks account for 2/3 of total reported portfolio investment in bonds. [3] For this group of countries, we can track or estimate investing sectors for over 90 percent of total bond holdings identified in the CPIS. [4] Bonds may be issued on domestic markets or on international markets. What matters for their classification is the residence of the issuer—bonds issued by the government or a resident corporate entity and bought by a nonresident are classified as portfolio debt liabilities of the issuing country, while bonds issued by an affiliate of an EM corporate entity domiciled offshore are liabilities of the offshore center. [5] Maggiori et al (2023) discuss in more detail the use of offshore affiliates by Chinese entities for equity and bond finance.
The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation.
Nearly 1,500 small businesses filed for Subchapter V bankruptcy this year through Sept. 28, nearly as many as in all of 2022, according to the American Bankruptcy Institute.
Bankruptcy petitions are just one sign of financial stress. Small-business loan delinquencies and defaults have edged upward since June 2022 and are now above prepandemic averages, according to Equifax.
An index tracking small-business owners’ confidence ticked down slightly in September, driven by heightened concerns about the economy, according to a survey of more than 750 small businesses. Fifty-two percent of respondents believed that the country is approaching or in a recession, said the survey by Vistage Worldwide, a business-coaching and peer-advisory firm.
Robert Gonzales, a bankruptcy attorney in Nashville, said he’s now getting four times as many calls as he did a year ago from small businesses considering a bankruptcy filing.
“We are just at the front end of the impact of these dramatically higher interest rates,” Gonzales said. “There are going to be plenty of small businesses that are overleveraged.”
Five Reasons for Surge in Bankruptcies
Rising Interest Rates
Surging Wages
Tighter Bank Credit
Overleverage
Work-at-Home Curtailing Demand
Fed Rate Interest Rate Hike Expectations Are Still Higher for Even Longer
The Fed has hiked interest rates to 5.25% to 5.50%. It’s the highest in 22 years.
Yes, governor, this is very big deal. It will increase the cost of eating out everywhere.
The bill Newsom signed only applies to restaurants that have at least 60 locations nationwide — with an exception for restaurants that make and sell their own bread, like Panera Bread (what’s that exception all about?)
Nonetheless, the bill will force many small restaurants out of business or they will pony up too.
30 Percent Raise Coming Up!
If McDonalds pays $20, why take $15.50 elsewhere?
The $4.50 hike from $15.50 to $20 is a massive 30 percent jump.
Expect prices at all restaurant to rise. Then think ahead. This extra money is certain to increase demands for all goods and services, so guess what.
Other states will follow California.
Biden Newsome Tag Team
Biden’s energy policies have made the US less secure on oil, more dependent on China for materials needed to make batteries, fueled a surge in inflation, and ironically did not do a damn thing for the environment, arguably making matters worse.
Newsom is doing everything he can to make things even worse.
The tag team of Biden and Newsom is an inflationary sight to behold.
Bank Credit and Over-Leverage
In the wake of the failure of Silicon Valley Bank, across the board small regional banks are curtailing credit.
The regional banks over-leveraged on interest rate bets. And businesses overleveraged too, getting caught up in work-from-home environments that curtailed demand for some goods and services.
The bankruptcies will fall hard on the regional banks.
Mining brings huge social and environmental change to communities: landscapes, livelihoods and the social fabric evolve alongside the industry. But what…
Mining brings huge social and environmental change to communities: landscapes, livelihoods and the social fabric evolve alongside the industry. But what happens when the mines close? What problems face communities that lose their main employer and the very core of their identity and social networks? A research fellow at the University of Göttingen provides recommendations for governments to successfully navigate mining communities through their transition toward non-mining economies. Based on past experiences with industrial transitions, she suggests that a three-step approach centred around stakeholder collaboration could be the most effective way forward. This approach combines early planning, local-based solutions, and targeted investments aimed at fostering economic and workforce transformation. This comment article was published in Nature Energy.
Credit: Kamila Svobodova
Mining brings huge social and environmental change to communities: landscapes, livelihoods and the social fabric evolve alongside the industry. But what happens when the mines close? What problems face communities that lose their main employer and the very core of their identity and social networks? A research fellow at the University of Göttingen provides recommendations for governments to successfully navigate mining communities through their transition toward non-mining economies. Based on past experiences with industrial transitions, she suggests that a three-step approach centred around stakeholder collaboration could be the most effective way forward. This approach combines early planning, local-based solutions, and targeted investments aimed at fostering economic and workforce transformation. This comment article was published in Nature Energy.
Dr Kamila Svobodova, Marie Skłodowska-Curie Research Fellow at the University of Göttingen, argues that, in practice, governments struggle to truly engage mining communities in both legislation and action. Even the more successful, often deemed exemplary, transitions failed to follow the principles of open and just participation or invest enough time in the process. Early discussions about how the future will look following closure help to build trust and relationships with communities. A combination of bottom-up and top-down approaches engages people at all levels. This ensures that the local context is understood and targeted specifically. It also establishes networks for collaboration during the transition. Effective coordination of investments toward mining communities, including funding to implement measures to support workers, seed new industries, support innovations, and enhance essential services in urban centres, proved to be successful in the past.
“To ensure energy security, it’s essential for governments to recognize the profound transformation that residents of mining communities experience when they shift away from mining,” Svobodova explains. “Neglecting these communities, their inherent strength of mining identity and unity, could lead to social and economic instability, potentially affecting the overall national energy infrastructure.”
Moving toward closure and consequently away from mining is not an easy or short journey. “It is essential that governments recognize that the transition takes time, and persistence is essential for success,” says Svoboda. “They should openly communicate their strategies, ensuring communities and other stakeholders are well-informed and engaged. Building trust and providing guidance helps residents navigate the uncertainties associated with transitions. By embracing the three-step approach that centers around stakeholder engagement, governments can prioritize equitable and just outcomes when navigating mining transitions as part of their energy security strategies.”
Original publication: Svobodova, K., “Navigating community transitions away from mining,” Comment article in Nature Energy 2023. DOI: 10.1038/s41560-023-01359-9. Full text available here: https://rdcu.be/dnmU3
Contact:
Dr Kamila Svobodova
University of Göttingen
Department of Agricultural Economics and Rural Development
Platz der Göttinger Sieben 5, 37073 Göttingen, Germany
With the commencement of the impeachment inquiry into the conduct of President Joe Biden, three House committees will now pursue key linkages between the president and the massive influence peddling operation run by his son Hunter and brother James.
The impeachment inquiry should allow the House to finally acquire long-sought records of Hunter, James, and Joe Biden, as well as to pursue witnesses involved in their dealings.
I testified this week at the first hearing of the impeachment inquiry on the constitutional standards and practices in moving forward in the investigation. In my view, there is ample justification for an impeachment inquiry. If these allegations are established, they would clearly constitute impeachable offenses. I listed ten of those facts in my testimony that alone were sufficient to move forward with this inquiry.
I was criticized by both the left and the right for the testimony.
Steven Bannon and others were upset that I did not believe that the basis for impeachment had already been established in the first hearing of the inquiry.
Without prejudging that evidence, there are four obvious potential articles of impeachment that have been raised in recent disclosures and sworn statements:
bribery,
conspiracy,
obstruction, and
abuse of power.
Bribery is the second impeachable act listed under Article II. The allegation that the President received a bribe worth millions was documented on a FD-1023 form by a trusted FBI source who was paid a significant amount of money by the government. There remain many details that would have to be confirmed in order to turn such an allegation into an article of impeachment.
Yet three facts are now unassailable.
First, Biden has lied about key facts related to these foreign dealings, including false statements flagged by the Washington Post.
Second, the president was indeed the focus of a corrupt multimillion-dollar influence peddling scheme.
Third, Biden may have benefitted from this corruption through millions of dollars sent to his family as well as more direct benefit to Joe and Jill Biden.
What must be established is the President’s knowledge of or participation in this corrupt scheme. The House now has confirmed over 20 calls made to meetings and dinners with these foreign clients. It has confirmation of visits to the White House and dinners and events attended by Joe Biden. It also has confirmation of trips on Air Force II by Hunter to facilitate these deals, as well as payments where the President’s Delaware home address was used as late as 2019 for transfers from China.
The most serious allegations concern reported Washington calls or meetings by Hunter at the behest of these foreign figures. At least one of those calls concerned the removal or isolation of a Ukrainian prosecutor investigating Burisma, an energy company paying Hunter as a board member. A few days later, Biden withheld a billion dollars in an approved loan to Ukrainian in order to force the firing of the prosecutor.
The House will need to strengthen the nexus with the president in seeking firsthand accounts of these meetings, calls, and transfers.
However, there is one thing that the House does not have to do. While there are references to Joe Biden receiving money from Hunter and other benefits (including a proposed ten percent from one of these foreign deals), he has already been shown to have benefited from these transfers.
There is a false narrative being pushed by both politicians and pundits that there is no basis for an inquiry, let alone an impeachment, unless a direct payment or gift can be shown to Joe Biden. That would certainly strengthen the case politically, but it is not essential legally. Even in criminal cases subject to the highest standard, payments to family members can be treated as benefits to a principal actor. Direct benefits can further strengthen articles of impeachment, but they would not be a prerequisite for such an action.
For example, in Ryan v. United States, the Seventh Circuit U.S. Court of Appeals upheld the conviction of George Ryan, formerly Secretary of State and then governor of Illinois, partly on account of benefits paid to his family, including the hiring of a band at his daughter’s wedding and other “undisclosed financial benefits to him and his family and to his friends.” Criminal cases can indeed be built on a “stream of benefits” running to the politician in question, his family, or his friends.
That is also true of past impeachments. I served as lead counsel in the last judicial impeachment tried before the Senate. My client, Judge G. Thomas Porteous, had been impeached by the House for, among other things, benefits received by his children, including gifts related to a wedding.
One of the jurors in the trial was Sen. Robert Menendez (D-N.J.), who voted to convict and remove Porteous. Menendez is now charged with accepting gifts of vastly greater value in the recent corruption indictment.
The similarities between the Menendez and Biden controversies are noteworthy, in everything from the types of gifts to the counsel representing the accused. The Menendez indictment includes conspiracy charges for honest services fraud, the use of office to serve personal rather the public interests. It also includes extortion under color of official right under 18 U.S.C. 1951. (The Hobbs Act allows for a charge of extortion without a threat of violence but rather the use of official authority.)
Courts have held that conspiracy charges do not require the defendant to be involved in all (or even most) aspects of the planning for a bribe or denial of honest services. Thus, a conspirator does not have to participate “in every overt act or know all the details to be charged as a member of the conspiracy.”
Menendez’s case shows that the Biden Administration is prosecuting individuals under the same type of public corruption that this impeachment inquiry is supposed to prove. The U.S. has long declared influence peddling to be a form of public corruption and signed international conventions to combat precisely this type of corruption around the world.
This impeachment inquiry is going forward. The House just issued subpoenas on Friday for the financial records of both Hunter and James Biden. The public could soon have answers to some of these questions. Madison called impeachment “indispensable…for defending the community” against such corruption. The inquiry itself is an assurance that, wherever this evidence may lead, the House can now follow.
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