Why China Does Not Have a Trade Surplus

Life has few certainties except for death, taxes, and large Chinese trade surpluses.  The expected large Chinese trade surpluses are always referred to as both proof of the strength of the Chinese economy and its financial foundation as money continues to flow in.  In nominal RMB terms, the trade surplus amounted to 5.5% of GDP or 79% of total GDP growth.  In other words, in 2015 China is almost entirely dependent on maintaining a large trade balance to drive GDP growth.

However, what if the assumed trade balance did not actually exist?  In fact, how would it change our understanding of the Chinese economy and financial markets if the assumed trade surplus was actually a trade deficit?  Unfortunately, this is not a counterfactual but the reality.  China is running a small trade deficit.

The widely cited international trade data is provided by Chinese customs records.  The value of goods leaving and entering and China is recorded by the Customs Bureau.  According to Customs data, China imported $1.69 trillion (10.45 trillion RMB) and exported $2.27 trillion (14.14 trillion RMB) for a resulting trade balance of $593 billion (3.7 trillion RMB).  These often repeated numbers form the basis for why China is running a large trade surplus.

Before explaining why China has no trade surplus, it is important lay some related groundwork.  By now China watchers knows about the practice of trade misinvoicing.  This is the practice where, as originally executed, capital was either moved into or out of the country based upon fraudulently invoicing an import or export.  For instance, by over invoicing an export, capital can flow into China as the foreign counter party is over paying for the good and vice versa for imports.

To take one example, of trade between Mainland China and Hong Kong, there are significant discrepancies between the value reported to Chinese customs and Hong Kong customs.  Hong Kong reported imports from China worth $255 million USD but China reported exports to Hong Kong of $335 million USD.  The 31% difference in customs prices, or $79 million, is too large to be unintentional and acts as a capital inflow into China.  Conversely, China reports $12.8 billion USD of imports from Hong Kong but Hong Kong only reports $2.6 billion USD of exports to China.  The 385% difference is far in excess of the low mid to single digit invoicing discrepancies that are standard in global trade.  Consequently, the $10.1 billion USD in over invoiced Chinese “imports” acts as a capital outflow from China.

Misinvoicing contributes a not entirely insignificant share to unrecorded capital inflows and outflows.  However, Chinese authorities have become much more aware and concerned about these issues and  gone through various waves of cracking down over this issue.  Furthermore, the aggregate sums here are not enough to move the RMB and cause the currency pressures we are currently seeing.  In fact, misinvoicing is merely the beginning of the financial flow problems in trade with Chinese innovation taking it a step further.

China, as a country with strict currency controls, maintains records on international financial transactions sorted by a variety of categories.  For instance, there is data on payment or receipt of funds by current or capital account, goods or service trade, and direct or portfolio investment.  For our purposes, this allows us to compare in a relatively straightforward manner, how international payments are flowing compared to the customs reported flow of goods.

The differences in key data surrounding trade data is illustrative.  Chinese Customs data reports goods exports valued at $2.27 trillion, with SAFE reporting goods exports of $2.14 trillion but Chinese banks report receipts of $2.37 trillion.  In other words, funds received for exports of goods and services or about $100 billion higher than reported.  At 4-11% higher than the Customs and SAFE reported values this is slightly elevated, but given expected discrepancies in the mid-single digits, this number is slightly elevated but not extreme.

The differences between import and international payment data, however, is astounding. Whereas Chinese Customs reports $1.68 trillion and SAFE report $1.57 in goods imports into China, banks report paying $2.55 trillion for imports.  In other words, funds paid for imported goods and services was $870-980 billion or 52-62% higher than official Customs and SAFE trade data.  This level of discrepancy is extreme in both absolute and relative terms and cannot simply be called a rounding error but is nothing less than systemic fraud.

If we adjust the official trade in goods and services balance to reflect cash flows rather than official headline trade data as reported by both Customs and SAFE, the differences are even worse.    According to official Customs and SAFE data, China ran a goods trade surplus of $593 or $576 billion but according to bank payment and receipt data, China ran a goods trade surplus of only $128 billion.  If we include service trade, the picture worsens considerably.  China via SAFE trade data reports a $207 billion trade deficit in services trade.  Payment data reported via SAFE actually reports about $42 billion smaller deficit of $165 billion.  In other words, the supposed trade surplus of $600 billion has become a trade in goods and services deficit of $36 billion.  Expand to the current, through a significant primary income deficit, and the total current account deficit is now $124 billion.

There are two very important things to emphasize about these discrepancies.  First, the imports customs and payment discrepancy is responsible for essentially all of the discrepancy between payments and customs.  Neither goods exports or differences between service imports at customs and payments explain the difference.  In fact, service is underpaid according to payment and customs data.  Second, if there was a more benign explanation, we would expect to see symmetry between various categories.  Rather, we see most categories reconciling close enough and one channel, conveniently enough one that funnels capital out of China, enormously mis-stated.

This discrepancy between official reported trade data and bank payments is a relatively new phenomenon but has been growing rapidly and reveals important details about flows into and out of China.  For instance, since 2010 China has an aggregate trade in goods and services surplus based upon payments of 1.9 trillion RMB; however, since 2012 an aggregate deficit of 120 billion RMB. 2010 and 2011 were the only years where China ran a trade in goods and services surplus using payments data rather than customs data.  Expanding to consider the current account significantly worsens the outlook.  From 2010 to 2015, China has run a current account surplus of 462 billion RMB but from 2012 to 2015 ran a deficit of 1.44 trillion RMB.  The reason for the shift is simple.  In 2012, China freed international currency transactions made through the current account creating an enormous asymmetry.

There are a number of important conclusions and implications of the data presented here.  First, if we adjust the Chinese traded good surplus on a cash flow basis and include the trade deficit resulting in a net export deficit, Chinese GDP growth in 2015 grew only 0.3%.  If a positive trade balance in economic accounting directly adds to GDP growth then a deficit directly reduces it.  Consequently, swinging from a goods trade surplus of 5.5% of GDP to a goods and services trade deficit of negative 0.3% of GDP has an enormous impact on GDP growth rates.  There is a key distinction here that is important to note and that is on a cash flow basis.  Economic accounting holds that GDP grows because when running a trade surplus, additional cash flow is received than is expended.  This leads to higher investment through savings. In 2015, financial flows indicate this did not happen and there was not trade surplus on a cash flow basis due to the discrepancy between Customs and SAFE reported trade in goods and services values and what banks paid.

Second, the impact on real GDP and output is currently unknown.  There are numerous reasons to question the veracity of numerous aspects of the data which would change our understanding of the data.  For instance, there are examples of goods round tripping into and out of China designed solely to facilitate implicit capital transactions.  Given the enormity of the discrepancy we see in payments for imports, we cannot rule out that a not insignificant amount of trade was either round tripping or phantom trade.  As physical output of many products from industrial to consumer only increased in the low single digits, this would match closer the implied Chinese growth rate of 0.3%.

Third, this sheds new light on the state of Chinese finances and RMB outflows.  For instance, the differential between Customs and bank data reveals rising outflow discrepancies since 2012.  While many have begun to worry recently about rising pressure on the RMB, it is clear that outflows from China are long lasting, large, and completely domestically driven.  In 2015 the capital account maintained healthy levels with the outward direct investment balance in a small deficit of 28.3 billion RMB while the securities investment balance was in an even tinier deficit of 2.9 billion RMB.  Consequently, calls for “temporary capital controls” or attributing it to a recent increase in outward direct investment reveal a profound misunderstanding of what the problem is. There is nothing temporary, foreign, or speculative about RMB outflows.  In fact, quite the opposite.  It is domestically driven long term capital flight which should change the framework of what solutions are called for in managing RMB policy.

Fourth, the change in the current account deficit is a major driver in changes to PBOC foreign exchange reserves.  While these are disguised capital outflows, for accounting purposes it is showing up in the current account statements.  Consequently, while China shows only small capital account deficit of $75 billion and a cash flow current account deficit of $121 billion, this shift largely explains the currency pressures on the RMB.  If you look simply at the Customs reported trade surplus, it would understandably be puzzling why the RMB is under so much pressure when China continues to run a $593 billion trade surplus.  However, in reality official flows are negative to the tune of about $200 billion in 2015.  Add in official net errors and omissions outflows in 2015 of $132 billion and it becomes quite clear why the Chinese RMB is under pressure.

Fifth, regardless the impact on GDP, it is quite clear that cash flows within the Chinese economy are very tight.  The boost from surplus payments that is typically seen from a trade surplus is not present and firms are struggling to pay bills.  Payables and receivables continue to rise rapidly as liquidity deteriorates.  Again we cannot say for sure whether this is actual production being purchased or simply phantom production, though it is likely some blend of the two. What is important to note is that liquidity is much tighter within the Chinese economy than understood.

Sixth, the nature of capital flight from China cuts directly to the heart of why capital controls would be a poor remedy.  Capital is not leaving through the capital account.  Rather with a restricted capital account and a relatively free international transaction via the current account, enterprising Chinese are moving capital via the current account.  To arrest the flood of capital leaving this way, it would require China to bring goods and services trade in the world’s second largest economy to a complete standstill.  Every transaction would have to be verified for units, market price, agreement between importer and exporter, and accurate payment matching the invoice.  It is simply not feasible to impose currency controls that would arrest disguised capital outflows via international goods and services payment without bring international trade in China to a halt.

It is likely the PBOC is aware of the discrepancy between Customs and SAFE reported trade data and what the banks are paying via the current account.  In his interview with Caixin, PBOC Governor Zhou Xiaochuan was very careful to say that China ran a “surplus in the trade of goods” rather than current account, trade surplus, or payments and receipts for international trade.  Many foreign and Chinese agencies and analysts confuse these multiple categories referring to them as one category but they are not.  His mention indicates he likely understands how capital is leaving the country and why capital controls would be a poor remedy which is also indicated.

It is quite clear that the expected $600 billion trade surplus is not hitting the Chinese economy for reasons and some implications that are still unclear.  What we can say, is that this is negatively impacting GDP growth and liquidity.

35 thoughts on “Why China Does Not Have a Trade Surplus

  1. Oh, this is beautiful! Thank you. Thank you. Thank you. I teach high-school economics and this exactly the sort of skulduggery that I’ve hinted at without having (until now) these details to back it up. Good job.

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  3. This is all very interesting but I don’t see a single source citation… can I at least get sourcing and thus access to this data? I’m not sure where to get customs reporting or reliable reporting from Chinese banks. SAFE

    • Sorry… to finish that post:

      I also cannot get SAFE data, whatever that is… so this is all being taken with a grain of salt for now.

      Also, why wouldn’t the IMF, WTO or BIS be talking about this if we’re estimating the fraud to be in the order of hundreds of billions by the second largest economy in the world?

      • I think I answered the SAFE question in the previous post. The IMF still publicly anyway states that China grew at almost 7% last year and wouldn’t know Chinese data from Chinese take out.

    • This data all comes from SAFE (State Administration of Foreign Exchange) and Chinese Customs. It’s on their website. I have a data terminal, think something like a Bloomberg terminal, except for Chinese markets so that’s where I get it. However, the data is all official data from SAFE and Customs.

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  6. please explain~.
    1. official surplus : $593 billion(goods) – $207 billion(service) : $386
    2. banks receipts of $2.37 trillion for exports(goods & service)
    3. banks paying $2.55 trillion for imports(goods & service)
    4. cash flow base.. deficit : 2.55t – 2.37t = $180 billion (goods & service trade)

    but why.. deficit of $36 billion?

    and you said..according to bank payment and receipt data, China ran a goods trade surplus of only $128 billion… how do you calculate that..please explain.

    • Sorry for the confusion let me try and explain. However, before addressing your specific questions, let me back up and note that one of the biggest problems here is the terminology that is used by the Chinese government and many others. The official customs data just says “trade”, exports, imports, and trade balance, easily leading one to assume that this covers all trade. Many others adopt this terminology or even expand it out to the Current Account but these all mean slightly different things.
      1. You are right on the math. What I am stressing here is the Chinese government either purposefully or by not correcting a perception has led most people to believe that even the official surplus is the larger $593 number. In fact, they do not even have data on the service trade balance until the beginning of 2014 which is recorded by SAFE. Many people use the officials customs data which says “trade” balance to mean all goods and services trade, very understandably I might add, and consequently believe the larger number.
      2. I probably didn’t clarify this enough. The $2.37 trillion was receipts for only goods exports.
      3. Banks to pay $2.55 trillion for imports of goods AND services..
      4. The $36b deficit comes from the sum of goods and services receipts less goods and services payment. #2 and #3 from above did not both have goods and services.
      5. The $128b surplus is just cash received for goods exports less cash paid for goods imports. In other words, this has nothing to do with the official customs value, nothing to do with services or primary income. What is important to note here is that it is only still in surplus because receipts for exports are a little higher than reported by customs.

      Sorry if I wasn’t clear originally and hope that clears up the discrepancy.

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  9. This is very interesting, but it is very important to more precisely identify the source of the data and learn more about how it’s gathered.

    Another thing I noticed is that the dollar and RMB values of customs data don’t quite match in 2015 and were way off in 2014. The 2015 #s imply average FX rates of 6.27 for exports and 6.23 for imports, which is a small discrepancy but in the opposite from expected directed (I have exports at 14.29 RMB/2.28 $, direct from customs, but imports same as yours). The 2014 #s (13.97 RMB / 2.34 $ exp, 10.93 RMB/1.96 $ imp), also direct from customs, imply average FX rates of 6 and 5.6 respectively, very odd.

    • Also I think one of the issues re: HK is that HK customs data includes a lot of goods that merely transit through HK. So if you’re looking for the match to HK exports to China in China imports data, it’s spread across the many countries from which those goods that merely transit via HK were ultimately sourced.

      • I’ll look more closely at your other comment on Monday. However, I can tell you HK breaks the data up into two types of trade. Export/import for HK only and Import/Export for Re-import/re-export. In other words, the data I have alreay accounts for that and the difference between them is quite substantial. Imports/exports excluding the re-trade, is actually pretty small compared to the total trade. In short, that is not really an issue.

        • Huh. That’s curious. I was using UN Comtrade, which gets data from national customs authorities. It has $300b of HK exports to China and only $10b of HK re-exports to China in ’14. And it has China’s reported imports from HK at a mere $13b. And usually China’s imports from major trade partners very roughly match their exports to China plus their exports to HK.

  10. Hi Chris,

    This is a provocative post! It’s been attracting quite a lot of attention. I’d like to offer a few constructive criticisms if that’s OK. (I might have to spread them across several comments.)

    The post contrasts SAFE’s balance-of-payments (BoP) data with its more obscure data on “foreign-related receipts and payments by banks on behalf of their clients”. (I’m going to call that the “bank data”.)

    First up, readers have been asking for the original data. They can obtain it directly from SAFE at this link.

    (Note that the numbers are reported in units of $100m)

    You can also see SAFE’s own description of this data (in English) at this link.

    The 2015 BoP figures are reported here (first in RMB, then in $):

  11. Some of the numbers in the blogpost don’t seem to line up with the original SAFE bank data. According to the original bank data, China’s goods exports were $2.3333 trillion in 2015 (see line I.1.1 in the data linked above) not $2.37 trillion as the blogpost reports.

    The blogpost seems to compare the BoP figure for goods imports ($1.57 trillion) with the bank data for goods and services imports combined (almost $2.55 trillion). If instead you compare like with like, you’ll see that the discrepancy is not $980 billion but $538.2 billion. That is still a very large discrepancy, but not quite as “extreme”.

    (For reference, these are the numbers as I see them:
    Bank data: Goods exports=$2.3333T. Services exports: $174.7b.
    Goods imports $2.2055T. Services imports $339.4b.
    BoP data: Goods exports: $2.145T. Services exports $230.4b.
    Goods imports: $1.5669T. Services imports $439.7b.
    I hope I’ve transcribed them correctly.)

    Note these inconsistencies do not affect the other headline results. As the blogpost says, the bank data suggest China has a goods surplus of only $127.8 billion ($2.3333-$2.2055) and a services deficit of $164.7 billion (174.7-339.4). Taken together, that results in a trade deficit in goods and services combined of $36.9 billion.

    • All this is completely fair. One issue that comes up is that there might be slightly different implied exchange rates. I tried to use RMB as the base and then calculate back into USD.

  12. What accounts for the remaining discrepancies between the bank data and the more familiar BoP data? It’s worth starting with a few innocuous explanations that might narrow the gap, if not necessarily eliminate it.

    In China, I believe, the balance-of-payments data report total imports on a “free on board” basis, which excludes the cost of insurance and freight. It may be that the bank data include those costs. That would narrow the gap somewhat (perhaps by about $80 billion or so).

    In addition, the bank data is reported on a cash basis, whereas the BoP data are reported on an accrual basis. In addition, the “scope” of the bank data is narrower than that of the BoP data. The bank data leave out the banks’ own transactions with the rest of the world for example. I also wonder how the bank data would handle intra-firm trade by border-straddling multinationals. (I guess it would depend on how the multinationals’ payments and bank accounts were organized.)

    The bank data themselves include an additional line which seems to report goods exports and imports in a manner more consistent with the customs data. (See the line entitled 海关统计口径的货物贸易.) Based on these numbers, the goods trade surplus was $211.7 billion and the overall goods and services balance would be $47 billion in surplus. I don’t know much about this line, but it would be worth investigating.

    • These are all very interesting and I will have to see if there is a way to tease out some differences. The primary hurdle here for me is that it would seem to require a type of asymmetry between the different items that we are talking about. By that I mean, only goods imports is seriously off. If there was something very mundane like timing or accounting method it would seem like the errors would be randomly distributed rather than concentrated. I’ll be honest that the most likely and seemingly probably explanation is payments fraud. However, like you I’ve been around China long enough to know anything is possible and will reserve judgement.

  13. Differences in data scope might narrow the gap. Assuming that some discrepancy remains, how do we explain it? The post seems to veer between two alternative interpretations. The first claim is that China is importing much more than we think (its trade surplus is “in reality” a deficit). The second explanation is that some of China’s capital outflows are being wrongly reported to banks as import payments (these import payments are really “disguised capital outflows” or “domestically driven long-term capital flight”). I think this second explanation is more plausible.

    Note that the two explanations can’t be equally true at the same time. They are rivals not complements. Insofar as one of them is true, the other must be less true. Each dollar, say, that is leaving the country as a hidden import payment is not also leaving the country as a disguised capital outflow. If a Chinese resident buys a foreign good, that’s an import. If instead the Chinese resident buys a foreign asset, that’s a capital outflow. Both cases represent a potential drain on reserves. But in only the second case is *capital* leaving the country. To me, the post seems a bit confused about this distinction, especially in conclusions three and four.

    • I was actually going to write a follow up post because I personally am of two minds and can see two (if not more) sides to some of the possible interpretations. I’ll be honest that I’m not sure what the right answer is, my thinking is fluid, and I see different arguments as very solid. So when you say it veers between two alternative explanations, I think that is fair and accurate. I plan on writing a follow up post and will keep you posted.

  14. Thanks for your considered responses. I have a few further thoughts. (I’ll shut up soon.)

    It’s interesting that on the face of it the bank data suggest less overall pressure on reserves than the BoP data. On the one hand, the bank data imply that China’s current account is in deficit not surplus, as you point out. But by the same token, the bank data also suggest that capital outflows are much smaller than they look in the BoP data: the financial and capital account outflow is just $80 billion. If you add that figure to the current-account deficit it comes to just $202 billion overall. That compares with the BoP data that suggest China lost $342.98 billion of reserves in 2015 due to actual transactions. (Reported reserves fell by more than that in total due to additional valuation effects.)

    The fact that the bank data make the current-account look worse but the financial/capital account look better is another strong hint that some capital outflows are being reported to banks as import payments. We might expect those capital outflows to show up in the balance of payments as errors and omissions. It’s interesting therefore that net errors and omissions in the BoP data correlate loosely with the discrepancy you identify between goods trade in the BoP data and goods trade in the bank data.

    (For a chart see https://twitter.com/s1moncox/status/703879096376414208 )

    • I think that is a solid analysis and I think what I’ve done gives us a solid clue/step forward to try and piece together what is going but definitely don’t considered the issue final or resolved. It does seem somewhat puzzling the pressure on the RMB given the difference between the reserve depletion and and payments discrepancy. There are probably many more issues that we just haven’t discovered yet.

  15. My biggest grumble about the post is the stuff on growth.

    According to the post, if China doesn’t have a trade surplus, it would mean its growth is really 0.3%. It’s not clear how that figure was calculated.

    In any event, it seems to mix up the level of GDP with the growth of GDP.
    Suppose China’s true imports were really $500 billion greater than the official figures report and that everything else remained the same. That would mean the *level* of China’s GDP is $500 billion smaller: China would be a $10.3 trillion economy not a $10.8 trillion economy.

    The implications for the growth of GDP are quite different. A trade surplus contributes to *growth* only if it increases from one year to the next (in constant prices). And so to calculate the true growth rate, you would want to know how the true import number in 2015 compares with the true import number in 2014. You would want to know whether true imports are growing much faster or slower (in RMB terms) than official imports. You can’t simply compare the true import number in 2015 with the official import number in 2015 and deduct the difference from the growth rate.

    The post makes an equally confusing calculation in the first paragraph. It says that China’s trade surplus amounted to 79% of total GDP growth in 2015. (This seems to come from the fact that China’s trade surplus was 5.5% of GDP, China’s official growth rate was 6.9%, and 5.5 is about 79% of 6.9.) But again, it makes no sense to compare the level of the trade surplus to the change in GDP. One should compare the change in the trade surplus to the change in GDP.

    An analogy might make this point clearer. Suppose Illinois accounted for 4% of the US population. And suppose the US population grew by 0.8%. One could not say that the population of Illinois accounted for 500% of total US population growth. But that is what the post seems to be saying about China’s trade surplus.

    • I will be posting a follow up addressing this issue detailing how this number was calculated. There are also multiple sides to consider, and my thinking is very fluid about this, on whether it is even right to say this is correct. Anyway, I’ll be posting a follow up in the next couple of days. No need to apologize or shut up as you know this as well as anyone.

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