The State Administration of Foreign Exchange (SAFE) recently released Preliminary Data on China’s Balance of Payments Statement for the Fourth Quarter and the year of 2015. The press spokesperson of the SAFE answered press questions on China's balance of payments as follows:
Q: Could you brief us on China's balance of payments for 2015?
A: China witnessed new changes to its balance of payments in 2015, with the twin surpluses that have continued for a long time replaced by the current account surplus and the capital and financial account (excluding reserve assets) deficit.
First, the current account surplus grew to nearly USD 300 billion. The current account surplus was USD 293.2 billion in 2015, up by 33% year on year, and the current account surplus as a percentage of GDP was 2.7%, compared with 2.1% in the previous year.
The surplus of trade in goods hit a new record high. In 2015, the surplus in trade in goods under balance of payments reached USD 578.1 billion, up by 33% year on year. The income from trade in goods was USD 2.145 trillion, down by 4%, while the expenditure was USD 1.5669 trillion, down by 13%.
Trade in services continued to be in deficit. In 2015, the deficit of trade in services was USD 209.4 billion, up by 39% year on year. The income from trade in services was USD 230.4 billion, down by 1%, while the expenditure reached USD 439.7 billion, up by 15%. Travel racked up the highest deficit among the items under trade in services, which was USD 195 billion in 2015, up by 81% year on year. The reason was Chinese residents' strong demand for study, travel and shopping abroad.
The deficit in primary income expanded. In 2015, the deficit in primary income (previously called primary yield) hit USD 59.2 billion, up by 74% year on year. The income was USD 230.1 billion, up by 8%, and the expenditure reached USD 289.3 billion, up by 17%. The cause of the deficit was that due to the heavy stock of FDI, the expenditure on return on investment grew faster than the income from the return on China's ODI.
The deficit in secondary income contracted. In 2015, the deficit in secondary income (previously known as current transfers) hit USD 16.3 billion, down by 46% year on year. The income was USD 37.9 billion, down by 8%, and the expenditure was USD 54.2 billion, down by 24%.
Second, the financial account was in deficit. China's non-reserve financial account deficit was USD 504.4 billion in 2015 (including net errors and omissions in the fourth quarter, but it is expected that the actual data may be lower than this figure).
Net inflows from direct investments dropped. In 2015, net inflows from direct investments reached USD 77.1 billion, down by 63% year on year. On the one hand, net outflows for ODI hit USD 167.1 billion, up by 108% year on year, suggesting that as the Belt and Road Initiative was promoted, Chinese enterprises became optimistic about the prospects for overseas investments and stepped up efforts to go global. On the other hand, net inflows from FDI reached USD 244.2 billion, down by 16% year on year, which, however, suggested that overseas investors remained optimistic about the long-term prospects for investing in China and net inflows from FDI remained high.
Third, foreign exchange reserves fell. As at the end of 2015, the balance of China's foreign exchange reserves was USD 3.3 trillion, down by USD 512.7 billion or 13% year on year. Specifically, the foreign exchange reserves arising from international transactions dropped by USD 342.3 billion, and the carrying value of the foreign exchange reserves arising from non-transaction factors such as changes of foreign exchange rates and asset prices fell by USD 170.3 billion.
Q: Why did the current account surplus increase significantly amid capital outflows in 2015? Will capital outflows put China's balance of payments at risk?
A: To answer this question, we should first look at the preparation of the Balance of Payments Statement. By the latest international standards, the Balance of Payments Statement contains the current account, and the capital and financial account. If errors and omissions are not taken into consideration, the absolute value of the current account surely equals that of the capital and financial account, and the sum of the two accounts is zero. This means that if the current account is in surplus, the capital and financial account is in deficit, to be sure. The larger the current account surplus, the higher the capital and financial account deficit.
According to the recording principle of the Balance of Payments Statement, the increase in external assets or the decrease in liabilities is recoded as capital outflows. This means that the deficit of the capital and financial account indicates the increase in China's net external assets. Previously, when the current account surplus was heavy, China achieved the equilibrium of the balance of payments by increasing reserve assets or making outbound investments with reserve assets, which are shown as capital outflows. But this changed dramatically in 2015, with capital outflows arising from significant increase in reserve assets replaced by capital outflows arising from significant increase in net external assets held by other private sectors.
The capital outflows in 2015 were the results of domestic banks' and enterprises' voluntary increase of their external assets and repayment of previous foreign financing, which were substantially different from withdrawal of foreign capital. In the year, reserve assets arising from international transactions dropped by USD 342.9 billion, and were shown as capital inflows in the Balance of Payments Statement while net capital outflows of USD 504.4 billion were recorded in the non-reserve financial account. This means while reserve assets were decreasing, net external assets held by the private sector were increasing. In the first three quarters (the data for the fourth quarter are unavailable), China witnessed an increase of USD 272.7 billion in external assets. To be specific, ODI as a result of the going global efforts went up by USD 115 billion, stock and bond investments through the Shanghai-Hong Kong Stock Connect or QDII, USD 57.3 billion, and other investments such as overseas deposits and foreign loans, USD 96.9 billion. External debt fell by USD 32.1 billion, while continued inflows of USD 184.1 billion were recorded under FDI. The decrease in external debt was chiefly due to the decreased non-resident deposits and the repayment of trade finance of previous years.
Generally speaking, the current capital outflows from China are the result of the shift of China's external assets from reserve assets to the private sector, and China's external assets and liabilities structure ensures the stability of its foreign-related economy and its capability to withstand strong impact. First, China's current account has remained in surplus and its net external assets are immense. As at the end of September 2015, China posted USD 6.28 trillion in external financial assets, USD 4.74 trillion in external debt and USD 1.54 trillion in net assets, which enabled it to remain at the world's second place by net assets. So long as the current account remains in surplus, there will surely be capital outflows as a result of the increase in net external assets, which will either be in the form of reserve assets or be held by the private sector. Second, the central bank has an enormous amount of foreign exchange reserves, which will be favorable for the government to concentrate resources to withstand possible impact from capital flows. By the end of 2015, China's reserve assets amounted to USD 3.33 trillion, which was the highest worldwide, nearly 3 times that of Japan (USD 1.2 trillion), the No. 2 worldwide, and 5 times that of Saudi Arabia (more than USD 600 billion), the No. 3 worldwide. Third, unlike other countries' external debt that is mainly comprised of short-term stocks of foreign-owned companies and bond investments, China's external debt is mainly FDI, which is made for the purpose of long-term and stable operation. As at the end of September 2015, China's stock of FDI amounted to USD 2.85 trillion, accounting for 60% of its total liabilities. As these investments have been integrated into the real economy, if foreign companies want to withdraw their investments, they need time to cash in the land, plants and machinery they have, and enough support from cash flows even if they want to remit out the accumulated undistributed profits. Fourth, the additional net external assets of the private sector are mostly productive assets, such as ODI, which are the positive results of making better use of domestic and overseas markets and resources. Both theories and practices show that it is a trend that the private sector will allocate productive and financial resources at the global level at a certain stage of economic development. Last but not least, it is an objective economic law that capital inflows will alternate with capital outflows while the long-term large-scale capital inflows are not sustainable. Between 2000 and 2013, as international capital flooded into emerging markets, China witnessed an astonishing amount of net capital inflows, which amounted to USD 1.35 trillion. As the domestic and foreign economic environments change, it is inevitable that China will witness usual and orderly capital outflows. Therefore, we should objectively view the changes in the balance of payments such as the capital and financial account deficit and the decrease in foreign exchange reserves.
Q: Could you please predict China's balance of payments in 2016?
A: Overall, it is expected that the pattern of "current account surplus and capital and financial account (excluding reserve assets) deficit" will continue in China's balance of payments in 2016, with the balance of payments staying stable and cross-border capital flow risk within control.
The current account will continue to be in surplus. On the one hand, trade in goods will be in surplus. The continued slow recovery of the world economy will help stabilize China's external demand. The IMF projection shows that the world economic growth will hit 3.4% in 2016, 0.3 percentage point higher than in 2015. Meanwhile, as the Belt and Road Initiative is implemented, bilateral and multilateral strategic cooperation will be deepened, providing new opportunities for exports. As the US dollar strengthens and the real demand remains sluggish, the commodity prices in the global markets will remain low, making it hard for import prices to rebound in the year. China's domestic demand will stay stable, so it is not very likely that imports will change dramatically and the import volume will remain lower than the export volume. On the other hand, trade in services will continue to be in deficit. Expenses on travel will still be the primary cause of the deficit as Chinese residents' consumption demand for travel and study abroad will remain strong. As a result, it is expected that the current account surplus, led by the surplus in trade in goods, will continue.
The capital and financial account is expected to stay in deficit, with either cross-border capital outflows or inflows under different entries. First, overseas long-term capital will remain optimistic about China's economic prospects and market potential and foreign capital aimed at long-term investments will continue to flow in. China posted a net FDI inflow of USD 244.2 billion in 2015, and is expected to continue to witness a large-scale net FDI inflow in 2016. Second, the normalization of the US monetary policy and the operational risks facing the emerging markets will continue to heighten the fluctuations of China's cross-border capital flows, and domestic market players' demand for the allocation of overseas assets and the tendency to deleverage overseas liabilities will remain. If the US adjustment of its monetary policy is consistent with market expectations, its impact on the global financial markets will be gradually released and the capital outflows from China under the capital account will remain orderly and controllable.
Overall, it is expected that China's balance of payments will remain stable and the cross-border capital flow risk will be within control in 2016. There are still many fundamental factors that support the stable and healthy operations of China's balance of payments. For example, with economic fundamentals having not changed substantially, China remains at the forefront among major economies by economic growth as its economic size keeps expanding, and the optimization and upgrading of its economic structure is accelerating. At the same time, China's current account remains in surplus, its foreign exchange reserves are still in abundance, and the outstanding short-term external debt as a percentage of the balance of foreign exchange reserves is far lower than 100%, the international security line. Therefore, China can fully ensure the receipts and payments in the balance of payments and is strong in withstanding the impact from cross-border capital flows.
