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China's Balance of Payments Data Does Not Add Up



The IMF’s surveillance cycle for China is wrapping up, and at least judging from the press release, China’s balance of payments was not a focus of the conversation. To get more latest china economy news, you can visit shine news official website.

I, of course, believe that the balance of payments is always central to understanding how any economy is interacting with the rest of the world economy, particularly for an economy whose visible trade surplus now approaches $1 trillion (a percent of world GDP).

But even setting that general point aside, there are a growing set of questions about China’s external data that are of fundamental importance to both China’s economy and the world economy.

Put simply, China’s external numbers just aren’t lining up. And they don’t really add up either. Often, the reported balance of payments is slightly at odds with the underlying source data.

China’s reported goods trade surplus doesn’t line up with … China’s reported goods trade surplus.

There is a roughly $200 billion gap between the goods surplus China reports in the balance of payments and the goods surplus Chinese customs reports to the world. This amount accounts for over a percent of Chinese GDP.Now, there are reasons why the balance of payments data can differ from the customs data. Notably, the charges on imported freight are included as goods imports in the customs data but moved over to the services data in balance of payments.

And so-called merchanting profits are included in the definition of trade in the balance of payments but not in the customs data. Basically, if a Chinese company has contracted for US liquefied natural gas (LNG) and sells that gas to a European company, it enters in the balance of payment data as a Chinese resident (the company, bought and sold the gas) but not into the customs trade data (the gas never entered a Chinese port). I learned about this after Apple became a balance of payments resident of Ireland back in 2014.*
For example, it is hard to explain why China’s exports in the balance of payments data are now $200 billion below China’s reported exports in the customs data. Certain imports and exports into legally offshore customs zones are netted out of the balance of payments data. But this adjustment should be symmetric, and it didn’t obviously start during the pandemic. The “merchanting” adjustment, if anything, should increase China’s surplus, as Chinese state oil companies have bought U.S. LNG on long-term contracts and sold it to Europe at a nice markup. (For more, see Adam Wolfe's comments on twitter)

Equally, the convergence of reported goods imports in the balance of payments with goods imports in the customs data is a bit strange.

For a long time, China just mechanically cut measured imports by 5 percent to account for freight (this was spelled out in the fine print of China's IMF data disclosure; see section 3.1.2), which probably wasn’t accurate but was at least consistent over time. Perhaps the shipping companies were so desperate to get containers back to China that they basically stopped charging for inbound freight? In any case, it is a bit strange.Well, one reason the surge in China’s external trade surplus hasn’t gotten the attention it deserves because it hasn’t translated over to the current account. As a share of China's GDP, China's current account surplus looks fairly stable.

More importantly, the difference between a balance of payments surplus of between 2 and 3 percent and a surplus of between 3 and 4 percent actually matters for a host of assessments of China’s economy. The size of the current account surplus (not the customs surplus) enters into the IMF’s assessment of the appropriate valuation of China’s currency. The reported current account surplus is also used by the U.S. Treasury in its assessment of exchange rate policies under the criteria set out in the 2015 Trade Enforcement Act. Both might need to reevaluate their choice of variables if questions about the quality of the reported current account data are not resolved.