Financial Market of China
--- Chinese Capital Account and Current Account
Introduction
Concept and Relationships between current account, capital
account and official reserves
Present Capital Account and Current Account
Reasons, Advantages and Disadvantages from the data
Forecasted Capital Account and Current Account
Reasons, Advantages and Disadvantages
from the Forecasted Results
Conclusion: Good Expectations for the Development of China
Part I
Current Account:
It is the sum of net sales from trade in goods and
services, net factor income (such as interest
payments from abroad), and net unilateral
transfers from abroad.
Capital Account: (Financial account)
It is the net change in foreign ownership of
domestic assets.
KA account deficit:
domestic ownership of foreign assets has increased more
quickly than foreign ownership of domestic assets
KA account surplus:
foreign ownership of domestic assets has increased more
quickly than domestic ownership of foreign assets
Official reserve:
It records the government's current stock
of reserves. Reserves include official gold
reserves, foreign exchange reserves, and
IMF Special Drawing Rights (SDRS).
Relationships between:
current account, capital account and official reserve
Current Account + Capital Account
= Change in Official Reserve Account
(Total) Figure 1 Factors that affect Capital Flows
Capital Inflows
Capital Outflows
Export
Import
Supply Labor
to foreign
Foreign supply
Labor to domestic
Obtain
Offer
Investment
Get foreign
capital
Foreign get
domestic capital
Loans
Foreign in debt
Domestic in debt
Official Reserve
Decreasing
Increasing
Export and
Import
Labor
Return of
Investment
Part II
Present Current account
and capital account
prevailing in China
China’s Balance of Payments Components,1994-2004 (USD billion)
1. Current Account Surplus
2001.11.10
China's accession to the World Trade Organization (WTO)
Export is booming faster
2005.07.21
Bank of China declared 2% appreciation of RMB
Exchange rate US dollar/ China RMB decreased from 8.27 to 8.10
2001~2007
The increase rate of current account = (160.6-17.4)/17.4 = 824.1%
2. Capital Account Surplus
Capital flows (1996-2002)
capital flow amount
($100 million)
600
400
200
0
-200
1996 1997 1998 1999 2000 2001 2002
-400
-600
Year
Capital
inflows
Capital
outflows
Net
differences
• Figure２:
• China’s International Direct investment of capital inflows and
outflows (1997-2003) Unit: $100million
Year
1996
1997
1998
1999
2000
2001
2002
Capital Inflows
417.3
452.6
454.6
403.2
407.2
468.8
535.05
2.7
28.2
23.8
22.4
70.9
20.87
Capital Outflows 21.1
Net Differences
-396.1 -449.9 -426.4 -379.4 -384.8 -397.9 -514.18
•Source from: According to 2003 Chinese foreign economical trade yearbook
2004 Chinese commerce yearbook computation
3. Official Reserve
Why this “Double surplus” ?
1. Increasing in FDI:
(1)FDI need to balance the resources settles
around the globe.
(2) Chinese economic characters strengthen the
capability to absorb capital in：
Cheap- Labour => Low Cost
Cumulative FDI
1980 1980 1990
1990
2000 2000 2003 2003
In
Out
In
Out
In
Out
In
Out
China
1.1
0 20.7
2.5 348.3 25.8 501.5
37
Japan
3.3 19.6
9.9 201.4
50.3
278
89.7
336
UK
63 80.4 204 229.3 438.6
898
627 1129
US
83
215 395 430.5
1214 1293 1554 2069
2. Less domestic invest abroad:
1. China’s stage of development:
2. China’s macro policy:
(1) Aim to enlarge the export, lack of independency.
(2) The examination and approval system is too complex.
3. The enterprises in China have problems themselves.
4. China has a relative higher return of interest on saving.
Figure 3:International Direct Investment flows and its growth rate (1997-2002)
Unit: $100milli on
All country
Developed country Developing country
Year
Inflows Outflows Inflows Outflows Inflows Outflows
1997
4819.11 4769.34 2696.54 3960.57 1932.24 766.62
Flows
Growth rate 24.80
20.74
22.62
9.15
26.55
25.04
1998
6860.28 6832.11 722.65 6308.91 912.84
Flows
Growth rate 42.36
43.25
75.14
59.29
-1.O
498.37
-34.99
Flows 10790.83 10965.54 8246.42 10213.07 2292.95 727.86
1999
Growth rate 45.26
44.31
80.72
59.82
-1.79 -32，81
2000
Flows 13929.57 12007.83 11205.28 10977.96 460.57
Growth rate 29.09
9.51
35.88
7.49
7.31
990.52
36.09
2001
8238.25 7114.45 893.79 6605.58 2094.31 473.82
Flows
Growth rate -40.86 -40.75 -47.40 -39.83 -14.89 -52.16
2002
6511.88 6473.63 4603.34 6000.63 1621.45 430.95
Flows
Growth rate -20.96
-9.1
-21.90 -9.16 -22.58 -9.05
Source from: According to 2004 Chinese comm erce yearbook reorganization
Advantages for this surplus in
capital account
1. Balance the international profit.
2. Having more money to boost up domestic
economy.
3. Lower unemployment Rate
Disadvantages for this surplus in
capital account
1. Means that the domestic market is occupied by
foreign investors.
2. Since foreign investor will gain from investment,
the profit as a financial capital massive will backflow
to developed country.
3. The domestic economical industrial structural
adjustment may be affected.
4. Financial foreign exchange crisis：
more pressure in appreciation of RMB
Part III
Forecast Capital Account
Reasons for Our Forecasts
Advantages of Our Forecasts Results
Disadvantages of Our Forecasts Results
The Volume of International Trade between China with UK, USA and Mongolia
(Source: World Trade Organization)
Import and Export in the 10th Five-year Plan Period
(www.stats.gov.cn/.../ t20060302_402308116.htm)
RMB exchange rate to USD
2005/07/21 to 2007/03/12
Source from: The People’s Bank Of China
From the data and Charts above,
there is big pressure for RMB to
appreciate, and let’s look at what
would happen for the capital account.
The appreciation of Chinese Currency
will make investment less attractive
because of the speculation reasons.
Adding…
Our Theoretical Prove
Recall: Current Account + Capital Account
= Change in Official Reserve Account
From the data above, China is now experiencing a
“Double Surplus” in both current account and capital
account.
=>If a government runs a current account surplus and has no
change in official reserves, then the current account surplus
must be balanced by a capital account deficit.
As there will be a Capital
account
deficit…
Advantages:
1. Avoid Repeat Investment
2. Balance the Payment of domestic without increasing
Official reserve.
3. Increasing the demand of foreign currency, which will
less the pressure of evaluated domestic currency.
Advantages:
4. Stop borrowing useless capital from
foreign countries and lending to foreign
countries.
5. Having more influence in global market.
6. Gain good money from investing abroad.
Explanation I : Solow Model
there is a decrease on saving rate
the saving line shifted from L1 to L2
the capital per worker (k) decreases from K1 to K2
the output decreases from y1 to y2
Worse off
Explanation Ⅱ : Disappear of Speculation
Short Run:
There is a difference between actual exchange rate
and market exchange rate
Investors have the motivation to get the
profit from speculation
If there is an appreciation on Exchange rate,
there will be a decrease on capital inflow
Long-Run:
The attractive points on investing foreign assets still exist
There will be a capital outflow
In total: KA will have a negative sign in the long term.
Explanation Ⅲ : Output Function
Y = C + I + G + Export - Import
d Y/Y = d C / C * C / Y + d I / I * I / Y + d G / G * G / Y + d NX / NX * NX / Y
There will be a decrease on economic growth.
Explanation Ⅳ : Labour Market
the cost of labour will increase.
the opportunities provided will decrease.
the unemployment rate will increase due to the above reasons.
Explanation Ⅴ : Aggregate Demand
Foreign investment decreases
Domestic interest rate decreases
Saving rate decreases
Domestic investment decreases
Less motivation for economic growth
R
LM
R1
IS1
R2
IS2
Y2
Y1
Y
Nowadays, China runs surplus on both
Current Account and Capital Account.
Under the pressure of International Trade
Partner, Chinese Currency has the tendency to
appreciate.
After the adjustment of Chinese Currency,
Speculation Investment will be withdrew.
China now is experiencing the specific
development period and there will be some
problems.
Group Members: Stella, Xu
Tony, Chen
Lucy, Zhang