Accounting for corporate behaviour would be simple, if it could be organised neatly according to national boundaries
the world go round. But where in the world is it going? In theory the answer lies in statistics published by the likes of America’s Treasury Department and the International Monetary Fund , which track cross-border flows of debt and equity investments. In practice creative corporate accounting mucks up the official figures. A growing body of research is trying to clean up the mess.
. Petrobras, a Brazilian oil giant, would sell its bonds directly to American or European investors. In reality many companies raise funds through foreign subsidiaries set up for the purpose. Petrobras raises debt through its subsidiary Petrobras Global FinanceSuch financial contortions cloud economists’ view of global investments. When a subsidiary transfers the cash from the loan to its parent, this can show up as foreign direct investment .
The authors stitch together seven data sets, including information on investor portfolios and the relationships between parent companies and their subsidiaries. Both debt and equity investments funnelled through tax havens are reallocated to the location of the parent company. What the official figures count as an American loan to Petrobras Global FinanceThis amounts to a large adjustment to the official data.
One of the most drastic revisions is to American holdings of equities in China, which official figures suggest were worth $160bn in 2017. That relatively low figure reflects the fact that the Chinese government restricts ownership in some key sectors. But it does not reflect Americans’ true financial stakes. In order to skirt the controls, Chinese companies set up “variable-interest entities”, which attempt to replicate the benefits of raising equity capital without falling foul of the rules.
All this shows that rules often lead only to financial gymnastics. The findings also expose risks. Some large emerging markets are much more exposed to currency depreciations against the dollar than the official data suggest. If a crisis hits, governments will have to sort through the tangle of loans owed by domestic companies but held outside their jurisdiction.
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