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Tax Havens Obscure $1.4 Trillion of Foreign Investment in China

U.S. and European investors’ holdings of assets controlled by Chinese companies but issued offshore are worth nearly three times as much as direct investments in companies registered in China.

By Tom Hancock & Spe Chen | January 06, 2023 at 08:34 AM
Stock illustration: Chinese markets

U.S. and European investment into mainland China has largely been channeled through offshore vehicles set up by Chinese companies in tax havens, according to newly published research. This suggests that foreign exposure to Chinese assets is much larger than official statistics imply.

U.S. and European investors’ holdings of equities and bonds that were issued by offshore vehicles and are controlled by Chinese companies such as Alibaba Group Holding and Tencent Holdings reached $1.4 trillion at the end of 2020, according to new estimates from the Global Capital Allocation Project based at Columbia and Stanford universities.

That is almost three times the amount investors from those countries held directly in companies registered in China.

The data shows the depth of the financial links between the world’s second-largest economy and the major developed economies, making any decoupling a challenging prospect. Those links also mean that foreign companies are more exposed to China than previously thought, and U.S. and European governments will need to pay greater attention to potential risks from investment in Chinese companies routed through these offshore entities, the researchers suggested.

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