Seminar on Balance of Payments for Secondary Economics

Seminar on Balance of Payments for Secondary Economics Teachers (Part I) 20 May 2011 政府統計處 Census and Statistics Department 1

Today’s rundown • How to Interpret Balance of Payments Statistics – – – Definition of the Balance of Payments Account Structure and Main Components Double-entry Accounting System Overall Balance of Payments Country Comparison 政府統計處 Census and Statistics Department 2

Definition of the Balance of Payments Account 政府統計處 Census and Statistics Department 3

International Standards • The Balance of Payments (Bo. P) account of Hong Kong is compiled in accordance with international standards stipulated in the Fifth Edition of the Balance of Payments Manual (BPM 5) released in 1993 by the International Monetary Fund (IMF). 政府統計處 Census and Statistics Department 4

Definition of the Balance of Payments Account • What is the Bo. P account? The balance of payments account is a statistical statement that systematically summarizes, for a specific time period, the economic transactions of an economy (residents) with the rest of the world (nonresidents). 政府統計處 Census and Statistics Department 5

Definition of the Balance of Payments Account What is the meaning of “economic transactions”? • involve – goods, services, factor income – financial claims / liabilities – transfers (offsetting entries to balance one-sided transactions) 政府統計處 Census and Statistics Department 6

Definition of the Balance of Payments Account What is the meaning of “residents”? • Centre of economic interest – For individuals: • normally stay in the economic territory of the economy • One year rule • irrespective of their nationality – For organisations: • ordinarily operate in the economic territory of the economy 政府統計處 Census and Statistics Department 7

Residence – Example (1) • A US engineer is working in Hong Kong. Which of the following amounts should be included in the calculation of the balance of Hong Kong’s current account? A. the part of her salary earnings that she deposits with a bank in Hong Kong B. the part of her salary earnings that she remits to her family in the US C. the money she pays to buy shares in Chinese stateowned enterprises quoted on the Hong Kong Stock Exchange D. the money she spends on buying clothes and toys in Hong Kong which are sent to her children in the US 政府統計處 Census and Statistics Department 8

Residence – Example (2) • Being a Hong Kong resident, Mr Wong earns a living in Hong Kong. He gets married to Mei-ling who lives in Mainland China. Which of the following events will NOT affect the balance of payments of Hong Kong? A. He buys a wedding ring in Hong Kong and takes it to her by himself. B. He remits a sum of money as the betrothal gifts through a bank to Mei-ling’s parents. C. He pays for the honeymoon trip to Thailand. D. He rents a residential apartment for her in Shenzhen. 政府統計處 Census and Statistics Department 9

Residence – More Examples J Mainland women giving birth in HK J Mainland people purchase property in HK under the previous Capital Investment Entrant Scheme 政府統計處 Census and Statistics Department 10

Structure and Main Components 政府統計處 Census and Statistics Department 11

Structure and Main Components 政府統計處 Census and Statistics Department 12

Structure and Main Components The Current Account measures • Flows of real resources including: • • Exports and imports of goods (visible trade a/c) Exports and imports of services (invisible trade a/c) Factor income receivable from and payable to abroad Current transfers from and to abroad • Exports and imports of goods and services in Bo. P correspond to those of GDP • Factor income in Bo. P corresponds to that in GNP 政府統計處 Census and Statistics Department 13

Structure and Main Components Goods general merchandise goods for processing ( in new standard) goods procured in ports by carriers repairs on goods ( in new standard) non-monetary gold • Goods (visible trade) a/c balance = Total Exports – Imports = (Re-exports + Domestic Exports) - Imports if > 0 surplus, < 0 deficit 政府統計處 Census and Statistics Department 14

Structure and Main Components Services transportation travel (goods and services acquired by travelers) financial services insurance services other services • Services (invisible trade) a/c balance = Exports – Imports if > 0 surplus, < 0 deficit 政府統計處 Census and Statistics Department 15

Structure and Main Components – Example 1 • Many tourists from Mainland China buy souvenirs at HK Disneyland. Suppose these souvenirs are made in Mainland China. Then the tourist spending mentioned above is a/an _____ to Hong Kong. A. B. C. D. domestic export of goods re-export of goods export of services import of services 政府統計處 Census and Statistics Department 16

Structure and Main Components – Example 2 Recently, especially after the launch of the Individual Visit Scheme (IVS), many Mainland tourists come to Hong Kong to purchase daily necessity e. g. baby milk powder, diapers, handbags, etc. Shall these be included under goods or services? G G HK customs regulations state that personal baggage valued over $4, 000 are required to lodge import/export declaration. Under the new international standard, travelers’ goods exceeding customs thresholds should be included under general merchandise not travel. 政府統計處 Census and Statistics Department 17

Structure and Main Components Factor Income • earnings receivable or payable for the provision of factors of production = investment income + compensation of employees Factors of Production Land Capital Entrepreneur Labour 政府統計處 Census and Statistics Department Return Rental Interest or dividend Profit (as dividend or retained profit) Compensation of employee 18

Structure and Main Components – Example 3 Bo. C (HK) employed a worker from Bo. C (China) to work in HK for a 6 month RMB insurance development project. 政府統計處 Census and Statistics Department 19

Structure and Main Components – Example 4 HK residents purchased H-shares and subsequently received dividends distributed by these state-owned enterprises. * this example refers to two transactions happening at different time points 政府統計處 Census and Statistics Department 20

Structure and Main Components Current Transfers • residents of an economy provide/receive real or financial resources to/from non-residents without the receipt/provision of equivalent economic values in return. • likely to be consumed immediately or shortly (≠ capital transfers) • offsetting entries for one-sided transactions • e. g. donations, workers’ remittances, official assistance, pensions, etc. 政府統計處 Census and Statistics Department 21

Structure and Main Components – Example 5 Hong Kong’s donations to Sichuan earthquake victims. What are the uses of these donations? food and clothes, re-building of schools? 政府統計處 Census and Statistics Department 22

Structure and Main Components – Example 6 • Last year, a film crew came to Hong Kong to make a Batman movie. The shooting of the film in Hong Kong would (1) improve the visible trade balance of Hong Kong (2) improve the invisible trade balance of Hong Kong (3) increase the GDP of Hong Kong. A. B. C. D. (1) and (2) only (1) and (3) only (2) and (3) only (1), (2) and (3) 政府統計處 Census and Statistics Department 23

Structure and Main Components The Capital Account cover external transactions in 1) Capital transfers 2) Non-produced, non-financial assets e. g. : land, patents, copyrights, licenses 政府統計處 Census and Statistics Department 24

Structure and Main Components The Financial Account • covers all transactions in the external financial assets and liabilities External financial assets of HK residents claims on non-residents, e. g. – HK residents purchase US Treasury Bills – HK companies establish a subsidiary in Canada holdings of monetary gold (貨幣黃金 ) by HKMA External liabilities of HK residents indebtedness to non-residents, e. g. – A US resident bank purchases shares of HK company – A UK resident purchase an option issued by a HK investment bank 政府統計處 Census and Statistics Department 25

Structure and Main Components Direct Investment (DI) (直接投資 ) Portfolio Investment (PI) (有價證券投資 ) Financial Derivatives (FD) (金融衍生具 ) Other Investment (OI) (其他投資 ) Reserve Assets (RA) (儲備資產 ) 政府統計處 Census and Statistics Department 26

Structure and Main Components Reserve Assets (RA) (儲備資產 ) • external assets (foreign currency assets and monetary gold) that are – readily available to, and – controlled by the HKMA • for – directly financing payment imbalances – indirect financing through foreign exchange market – other action/influence 政府統計處 Census and Statistics Department 27

Structure and Main Components – Example 7 The strong-side convertibility undertaking has been triggered many times in end 2008 and 2009. G Large capital inflow into HK after the financial tsunami in end 2008. G HK received more foreign currencies than she paid in international transactions G Abundant foreign currencies and high demand for HKD exchange rate ↑ G HKMA purchased foreign currencies with HKD under the Currency Board System Reserve Assets ↑ 政府統計處 Census and Statistics Department 28

Double-entry Accounting System 政府統計處 Census and Statistics Department 29

Double-entry Accounting System Every recorded transaction is represented by two entries with equal values but in opposite sign • credit (+) 貸方 • debit (-) 借方政府統計處 Census and Statistics Department 30

Double-entry Accounting System Credit (貸方 ) Current account (經常帳 ) Goods (貨物 ) Services (服務 ) Income (收益 ) Current Transfers (經常轉移 ) Debit (借方 ) exports imports (出口 ) (進口 ) exports imports (輸出 ) (輸入 ) receivable payable (收取 ) (支付 ) from abroad to abroad (從外地來的 ) (往外地的 ) Gross recording principle 政府統計處 Census and Statistics Department 31

Double-entry Accounting System Capital and Financial Account • Net recording principle • Either net credit (+) or net debit (-) for each component Assets net credit (+) net↓ net debit (-) 政府統計處 Census and Statistics Department net↑ Liabilities net ↑ net ↓ 32

Double-entry Accounting System - Example • Hong Kong imported HK$ 10 million of goods from Japan. HK$ million Credit Goods Appropriate financial account item Debit 10 10 Decrease in financial asset / Increase in financial liabilities 政府統計處 Census and Statistics Department 33

Double-entry Accounting System In principle sum of all credit entries ≡ sum of all debit entries ð net balance of all entries in the Bo. P account = 0 政府統計處 Census and Statistics Department 34

Double-entry Accounting System In practice the accounts frequently do not balance Ä different Bo. P components are measured independently from different data sources ð net errors and omissions = residual amount (reversed sign) 政府統計處 Census and Statistics Department 35

Overall Balance of Payments 政府統計處 Census and Statistics Department 36

Overall Balance of Payments • The sum of all market transactions with the rest of the world, excluding transactions of the central bank = current a/c balance + capital and financial a/c balance – net change in reserve assets or simply = current a/c balance + capital and financial non-reserve assets 政府統計處 Census and Statistics Department 37

Overall Balance of Payments For a reference period, Receives Pays ＞ foreign currencies in external transactions, = Overall net inflow of funds from the rest of the world Bo. P surplus. Otherwise, it’s a Bo. P deficit 政府統計處 Census and Statistics Department 38

Overall Balance of Payments Hong Kong Bo. P account (HK$ Mn) 2008 2009 2010 229, 506 139, 249 108, 244 Goods -180, 091 -208, 220 -333, 805 Services 352, 146 329, 228 431, 655 Income 83, 306 42, 866 36, 568 -25, 855 -24, 625 -26, 174 32, 707 393, 891 -66, 324 Reserve Assets Net errors and omissions -263, 869 1, 656 -549, 262 16, 122 -71, 086 29, 166 Overall Bo. P 263, 869 (surplus) 549, 262 (surplus) 71, 086 (surplus) Current account Current Transfers Capital and Financial Account (Non-reserves) 政府統計處 Census and Statistics Department 263, 869 39

Country Comparison 政府統計處 Census and Statistics Department 40

Country Comparison Bo. P account (2010) (US$ Bn) Hong Kong China United States 13. 9 305. 4 -470. 2 Goods -43. 0 254. 2 -647. 1 Services 55. 6 -22. 1 151. 3 Income 4. 7 30. 4 163. 0 Current Transfers -3. 4 42. 9 -137. 5 Capital and Financial Account (Non-reserves) -8. 5 226. 0 236. 9 Reserve Assets Net errors and omissions -9. 2 3. 8 -471. 7 -59. 7 -1. 8 235. 1 Current account Overall Bo. P 政府統計處 Census and Statistics Department 9. 2 (surplus) 471. 7 (surplus) 1. 8 (surplus) 41

Country Comparison Bo. P account (2010) Hong Kong Current account (as a ratio to GDP, %) China United States 6. 2 5. 2 -3. 2 Goods -19. 1 4. 3 -4. 4 Services 24. 8 -0. 4 1. 0 Income 2. 1 0. 5 1. 1 -1. 5 0. 7 -0. 9 Capital and Financial Account (Non-reserves) -3. 8 1. 6 Reserve Assets Net errors and omissions -4. 1 1. 7 -8. 0 -1. 0 ** 1. 6 Overall Bo. P 4. 1 8. 0 ** Current Transfers Note : ** Less than ± 0. 05 percentage point. 政府統計處 Census and Statistics Department 42

Thank you! 政府統計處 Census and Statistics Department 43