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The Outlook of Mainland’s Balance of Payments Rebalancing

After four decades of opening up and reform, the Mainland not only recorded tremendous economic performance and becomes the second largest economy in the world, but its economy is also moving from a relatively closed one in late 1970s to a more open one. The increasing connection between the Mainland’s economy and the rest of the world could be shown in its current account and overall balance of payments over the past decade. Going forward, the further opening up of Mainland’s financial market and service sector will also bring notable changes to its current account and overall balance of payments.

Current account surplus has narrowed notably since 2015

The Mainland has recorded current account surplus since 1994. The current account surplus held rather steadily at around 2% of its GDP in the beginning of this century, which then increased tremendously to a peak of 9.9% of GDP in 2007 during the early years of China’s accession to the WTO when it recorded very rapid exports growth. After reaching its peak in 2007, the Mainland’s current account surplus has narrowed substantially to just 0.4% of GDP in 2018. The substantial narrowing of the Mainland’s current account surplus was largely due to slowing merchandise trade growth after the global financial crisis and the continuous rapid increase of services imports.

There are four major components in the current account, i.e. goods trade, services trade, primary income and secondary income. The current account of the Mainland was mainly driven by the activity of goods trade throughout its development history, but the impact of services trade has become increasingly more important over the past decade. Primary income mainly comprises of compensation of employees and investment income, while secondary income records current transfers, which includes workers’ remittances, donations, official assistance and pensions. The net flows in both primary income and secondary income accounts are relatively small, normally not more than 1% of its GDP.

Similar to the overall trend of its current account, goods trade has recorded surplus for every year since 1994, with its share of GDP held at around 2.5% of GDP in the beginning of this century to its peak of 8.5% of GDP in 2007, which then declined gradually to 2.9% of GDP in 2018. The rapid increase of goods trade surplus in the beginning of the century was the result of sharp increase in goods exports after China’s accession to the WTO in late 2001. The goods exports of the Mainland recorded six consecutive years of over 20% growth between 2002 and 2007. By the end of 2008, the Mainland’s total goods exports amounted to US$ 1.43 trillion, a 438% increase from its 2001 level. The rapid increase in goods exports also led to a similar increase in trade surplus. Goods trade surplus increased from US$ 22.5 billion in 2001 to US$ 298.1 billion in 2008, which became a major driving force for the current account surplus at that time. However, goods exports slowed substantially after the global financial crisis (particularly after first two years of recovery in 2010 and 2011) to an annual compound average of 3.9% between 2012 and 2018, which was lower than the annual average nominal GDP growth rate of 9.1% during the same period. On the other hand, the Mainland’s economy is now moving towards more domestically driven, with consumption the main driver. The growth of goods imports also accelerated to over 15% in both 2017 and 2018, outpacing that of goods exports and resulting in a reduction of goods trade surplus as well.

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Content provided by Bank of China (Hong Kong)
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