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Macro View | China’s InternationalBalance of Payments in Recent Years

Updated: Nov 13, 2018

In recent years, China's international balance of payments has changed from the past "double surplus" to "one by one." In other words, the current account is still a surplus, however, the non-reserve nature of the financial account is a continuous deficit. This change makes foreign exchange reserves no longer able to unilaterally increase interest rates.

The Balance of Payments Structure

The balance of payments reflects the transactions between an economy and other economies, such as import and export trade, investment, and financing transactions. The balance of payments statistics is finalized to form the Balance of Payments (BOP).

The main structure of the Balance of Payments is the current account, capital, and financial accounts. The current account is divided into the goods and services account, the initial income account (mainly employee compensation and investment income), and the second income account (frequent transfers between residents and non-residents, including cash and related.) The capital account refers to the transfer of capital between residents and nonresidents, as well as the acquisition and disposal of non-productive and nonfinancial assets between residents and nonresidents. Financial accounts are divided into direct investment, securities investment, financial derivatives, employee stock options, other investments, and reserve assets.

Since foreign exchange reserves are a great deal of concern, the account is often left alone. Financial accounts that do not contain reserve assets are called non-reserve financial accounts, or capital and financial accounts (excluding reserve assets).

China’s Balance of Payments Simplified

In the table below, frequently used items summarize the initial income account and the second income account. The non-reserve financial account summarizes direct investment, securities investment, financial derivative products, employee stock options, and other investments.

Changes in the Balance of Payments in Recent Years

1. China’s trade in goods has maintained a large surplus

In 2016, the trade surplus was $494.1 billion which was lower than 2015’s, but still higher than both 2013 and 2014. In fact, since the 1990s, China has maintained a trade surplus position. When compared with the trade surplus of $130.1 billion in 2005, the trade surplus in 2016 has increased by roughly 280%.

2. Trade in services deficit has expanded

Services include processing services, maintenance and repair, transportation, travel, construction, insurance and pension, financial, intellectual property use fees, telecommunications, computer, and information services. In 2016, China's trade deficit was $244.2 billion, an increase of roughly 12%. The trade deficit is mainly due to the travel deficit of $216.7 billion. From 2012-2016, China’s travel deficits were $519, $769, $183.3, $204.9, and $216.7 billion respectively, showing a significant annual growth trend. This reflects the income level of residents to enhance the openness of relevant policies, gradually increasing Chinese residents’ international travel, study, and other spending rates.

3. From the “double surplus” to a “one by one” transformation

In 2013, the basic pattern of China's international balance of payments is a "double surplus", where the current account surplus and non-reserve financial accounts, capital, and financial accounts (excluding reserve assets) maintained a surplus. Since 2014, the basic pattern of China's international balance of payments has changed to "one by one", where the current account remains in surplus, but non-reserve financial accounts have remained in a deficit for 3 consecutive years.

4. “One by One” the end of one-way growth of foreign exchange reserves

Current accounts and non-reserve financial accounts continue to surpass recorded foreign exchange reserves, but in the "one-and-one" pattern, foreign exchange reserves will no longer continue to grow, and in some years, may be reduced, or increased in others. This will be the norm for the future.

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