The State Administration of Foreign Exchange (SAFE) has recently released the Balance of Payments and the International Investment Position for 2016, and its spokesperson answered media questions on relevant issues.
Q: Could you brief us on China's balance of payments for 2016?
A: In 2016, China's balance of payments continued to present the pattern of "one surplus and one deficit", namely, surplus under the current account and deficit under the capital and financial account (excluding reserve assets).
In 2016, the surplus under the current account remained at a reasonable level in China. The surplus hit USD 196.4 billion in the year, accounting for 1.8% of GDP. In particular, a surplus of USD 494.1 billion was registered under trade in goods, down by 14% from the historical high of last year, but remaining much higher than the levels of 2014 and the years before, showing China was still competitive in foreign trade. A deficit of USD 244.2 billion was recorded under trade in services, up by 12%, chiefly due to a growing deficit under tourism, suggesting that the Chinese residents' spending on travel and study abroad is rising alongside the increase in people's income and the opening up of relevant policies, but the deficit under tourism grew at a slower pace of 6% only in 2016, which was down by 6 percentage points year on year.
The pressure from cross-border capital outflows was relieved to some extent, but went through ups and downs in the four quarters. In 2016, a deficit of USD 417 billion was registered under the non-reserve financial account, down by 4% year on year. To be specific, a deficit of USD 126.3 billion was recorded under this item for the first quarter, down by 16% from USD 150.4 billion for the fourth quarter of 2015; the deficit contracted significantly to USD 52.4 billion in the second quarter but rebounded remarkably to USD 135.1 billion in the third quarter, the highest quarterly deficit in 2016, but remaining much lower than the deficits for the third and fourth quarters of 2015; and then the deficit shrank to USD 103.1 billion in the fourth quarter, down by 31% year-on-year.
Q: Could you tell us why the surplus under the current account for the fourth quarter of 2016 dropped by more than USD 20 billion from the preliminary statistics?
A: In the fourth quarter of 2016, China posted USD 11.8 billion in the surplus under the current account, about USD 26 billion less than the preliminary statistics of USD 37.6 billion. This is chiefly because:
First, the profit of foreign-funded enterprises estimated based on the latest data rose, leading to increases in the expenses under ROI and in the deficit under primary income. In China's Balance of Payments, the profits generated by FDI that belong to foreign parties are the profits of foreign-funded enterprises above designated size and the investment enterprises from Hong Kong, Macao and Taiwan calculated by the National Bureau of Statistics. The statistics show that enterprises' operations picked up as China's economic performance was being stabilized. In 2016, the total profits from industrial enterprises above designated size grew by 8.5% from that of the previous year. In particular, the total profits of foreign-funded enterprises and investment companies from Hong Kong, Macao, and Taiwan went up by 12.1%. But as the Balance of Payments was prepared, no data for the whole year were disseminated, and as a result, the preliminary estimates were USD 20 billion lower than the official data. But considering the preliminary data covered all the profits remitted outward, the undervalued RMB 20 billion in the expense under ROI was still recorded under the inflows of FDI under the financial account in recording the expense on ROI under the current account in the Balance of Payments, based on accrual accounting since the expense was not remitted outward. Such recording will affect the structure — but not the overall situation—of the Balance of Payments.
Second, as the way the statistics on travel income and expense was adjusted, with payment channel data used, the deficit under tourism rose. In the new method, the revenue and expense under tourism were compiled based on the payment channel data such as credit card, debit card, remittance and banknotes. The deficit under tourism for the four quarters estimated using the new method was USD 6 billion higher than the preliminary statistics. At the same time, retrospective adjustment was made to all of the revenues and expenses under tourism for the quarters since 2014, which were recorded under relevant entries under the financial account, instead of the current account.
Q: Could you brief us on the features of cross-border capital flows for 2016?
A: In 2016, Chinese market players continued to increase their holding of external assets, and saw the conversion of net outflows of external debts in the last year into net inflows.
On the one hand, the domestic market players have diversified the ways of using external funds, with ODI, portfolio investments and other investments on an upward trend. In 2016, the external assets held by domestic market players in various forms grew by USD 661.1 billion, up by 98% year on year. To be specific, a net increase of USD 217.2 billion was registered under ODI, up by 25%; a net growth of USD 103.4 billion was recorded under external portfolio investment, up by 41%; and a net increase of USD 333.6 billion in other investments such as overseas deposits and external loans, climbing by 305%.
On the other hand, as the domestic securities market is liberalized and the demand for financing rebounds among enterprises, net inflows of external debt have replaced net outflows of the previous year. In 2016, a net inflow of USD 244.1 billion was registered under foreign investments such as FDI, portfolio investments and other investments, compared with USD 101.0 billion in net outflows for 2015. In particular, a net outflow of USD 13.5 billion was registered in the first quarter, but a net inflow had been recorded and risen quarter after quarter since the second quarter, hitting USD 77.1 billion, USD 84.2 billion and USD 96.3 billion respectively. First, foreign capital under direct investment sustained net inflows, which amounted to USD 170.6 billion throughout the year, including USD 95.8 billion for the second half, up by 28% from the first half. Second, foreign portfolio investment maintained a net inflow of USD 41.2 billion, 512% higher than that of the previous year, which indicated China's increasing attractiveness to foreign capital and deepened liberalization. Third, a net inflow of USD 30.1 billion in other foreign investments was recorded, compared with the net outflow of the previous year, suggesting domestic market players' servicing of foreign debt has come to a halt, and the demand for cross-border financing is rising.
Q: Could you tell us about the changes in international investment position at the end of 2016?
A: In 2016, China's external financial assets, liabilities and net assets all registered growth. As at the end of 2016, China posted external financial assets of USD 6.4666 trillion, external debt of USD 4.666 trillion, up by 5% and 4% year on year respectively, and net external assets of USD 1.8005 trillion, a year-on-year increase of USD 127.7 billion, or 8%.
The external assets held by the private sector have for the first time accounted for more than half of the total. As at the end of 2016, the balance of international reserve assets reached USD 3.0978 trillion, including USD 3.0105 in the balance of foreign exchange reserves. The reserve assets took up 48% of China's external financial assets, still topping China's reserve assets, but the ratio dropped by 7 percentage points year on year, the lowest level since China began to disseminate the international investment position data in 2004. That the proportion of the external assets held by the private sector exceeded half of the total shows that China's external economic and financial communication are shifting from the focus on commodity exports to equal importance of commodity exports and capital exports, and from the focus on external investing by official authorities to the equal importance of outbound investments by official authorities and the private sector.
The rises in external debt were primarily contributed by the sustained growth in FDI and the increases in other foreign investments. By the end of 2016, of China's external debt, FDI hit USD 2.8659 trillion, up by 6% year on year, and continued to take the first place among external debt, accounting for 61%, indicating foreign investors are still optimistic about making long-term equity investments in China. Moreover, external debt from investments such as non-resident deposits and external loans reached USD 984.9 billion, down by 2% year on year and accounting for 21% of total debt.
Q: What are your expectations of China's balance of payments for 2017?
A: Overall, China's balance of payments for 2017 will continue to present the landscape of "surplus under the current account and deficit under the capital and financial account (excluding reserve assets, the same below)", and cross-border capital flows will continue to develop towards an equilibrium.
The surplus under the current account will continue to remain within the reasonable range. First, a surplus will continue to be registered under trade in goods. With regard to exports, though trade frictions will potentially threaten China's exports, yet the stable global economic growth in 2017 will continue to provide a basic guarantee for stable external demand in China. Moreover, as relevant cooperation projects such as the Belt and Road Initiative are stably advanced, the countries within the region will benefit in exports. As for imports, China's economic fundamentals will remain sound, and the global prices of commodities will pick up, and therefore, the imports are expected to stay stable. Second, the growth of deficits under trade in services will be stabilized. Tourism has constituted the majority of the deficits under trade in services. As the consumption demands for travel and study abroad are unleashed quickly, the deficit under tourism has begun to be stabilized over the past two years; and as Chinese enterprises are adjusting the revenues from trade in services and their spending structure, the deficits in trade in services other than tourism have contracted substantially. Third, as investments such as ODI by the private sector are on the rise, China is expected to see growing returns from outbound investments. It is expected that the surplus under the current account as a percentage of GDP will hit a balanced and reasonable level in 2017.
The deficit under the capital and financial account is expected to contract. On the one hand, due to unstable and uncertain international environment, the market sentiment may often change, thus leading to the interim volatilities in China's cross-border capital flows. On the other hand, the factors that are favorable for the equilibrium between inflows and outflows of cross-border capital will continue to play positive roles. First, China's economy has remained stable recently, with relevant risks being controllable, and the government has introduced policy measures to expand opening up and actively leverage foreign capital, and the foreign investment environment has been optimized further, which will be conducive to boosting the inflows of long-term capital. Second, as Chinese enterprises' comprehensive strength is strengthened and the global demand for resource allocation is enhanced, China has embraced high-speed growth in ODI in recent years. After achieving fast growth in the short term, enterprises' awareness of investment risks will be raised, and their outbound investment will be more reasonable and stable. Third, turning to the policy of expanding the opening up of the financial market, China has implemented the policies such as macro-prudential management of full-coverage cross-border financing, boosting the further opening up of the interbank bond market, and deepening foreign exchange administration for QFII and RQFII, which have produced positive outcomes, and will continue to attract the sustained inflows of cross-border capital. As the market-oriented RMB exchange rate formation mechanism reform is being stably pressed ahead with, the elasticity of the RMB exchange rate will be enhanced, which will be favorable for the inflows and outflows and two-way fluctuations of cross-border capital in China.
