Some Chinese Balance of Payments Puzzles
I just want things to make sense.
My apologies for the delay since my previous note. It turns out that my daughter picked up a covid case right at the end of last month, which she then transmitted to us. Thankfully she’s fine now, and my wife is also on the mend, although she was hit much harder. (I managed to avoid getting sick thanks to an asymptomatic case I picked up at the end of July.) Caring for the sick without access to childcare has impaired—and is still impairing—my ability to produce the kind of research you expect.
Looking ahead, you should expect in-depth pieces in the hopefully not-too-distant future on U.S. inflation, what we can learn from recent events in the U.K., my latest analysis of the impact of the Russia sanctions, a comprehensive update on the Chinese economy, and the continuation of my series on how the ideas we laid out in Trade Wars Are Class Wars fit with the experience of the past few years.
Until then, I hope you will appreciate this note on China’s balance of payments.
China’s current account balance may be underreported. If so, then there would be corresponding financial outflows missing from the official data.
As I pointed out a few months ago, there has been a growing disconnect between China’s trade balance in physical goods according to the General Administration of Customs (GACC) versus the State Administration of Foreign Exchange (SAFE, which compiles the balance of payments numbers). While there are conceptual differences between customs and BOP-based trade measures, the gaps are usually trivial for large countries such as China.1
From January 2015 through October 2020, GACC reported a cumulative goods trade surplus of $2.75 trillion, while SAFE reported a cumulative goods trade surplus of $2.85 trillion. Those numbers aren’t identical, but they are within 4% of each other. From November 2020 through August 2022, however, GACC reported a goods trade surplus of $1.40 trillion, while SAFE reported a surplus of $1.16 trillion. So far this year, the trade surplus according to GACC is 28% larger than what is being reported by SAFE.
Using the GACC numbers instead of the ones from SAFE would lift China’s current account surplus in the first half of 2022 from $166 billion to $234 billion. That’s a 40% difference!
But even without this adjustment, there is another reason to suspect that China’s current account surplus could be underreported. Until the pandemic, the current account balance was essentially the same as the trade balance. That relationship has broken down recently, to the point that the current account balance fell in 2022Q2 even as the trade surplus rose.