Current account statistics

inSight

18 Nov 2004

Current account statistics

Understanding Hong Kong's current account statistics is essential to our effective response to any possible external financial shocks.

Those observing closely the performance of our economy may have noticed the fairly sharp changes recently in Hong Kong's international payments positions. The balance of payment statistics are published regularly by the Census and Statistics Department in the form of the quarterly balance of payments account of Hong Kong: they are arguably the most difficult set of data to interpret in any economy. This is particularly the case for Hong Kong because of the highly externally oriented nature of our economy and our role as an international financial centre.

Using the figures of last year as illustration, the total amount of what is called current account transactions is equivalent to 3.9 times the Gross Domestic Product (GDP). Imports and exports of goods, import and export of services, and what is called factor income (wages and profits paid in Hong Kong to non-residents and received by residents from abroad) are respectively equivalent to 2.9, 0.5 and 0.5 times the GDP. These numbers put us as one of the most externally oriented economies in the world. So, unlike many economies with the external sector being relatively small, various indicators of economic conditions that make use of the balance of payments numbers tend, in Hong Kong, to exhibit much greater volatility, presenting considerable difficulties in interpretation.

One such an indicator is the current account surplus or deficit as a percentage of the GDP, which, taking a rather simplistic view, tells how well an economy is earning the foreign exchange needed for imports by selling its products overseas. For many economies, a current account surplus or deficit amounting to four or five per cent of GDP is considered large ?at five per cent of the GDP, the current account deficit of the United States, for example, is already considered unsustainable. And improvement or deterioration of that number comes slowly. But for Hong Kong the surplus or deficit can be very large and can move very quickly. This was indeed the case in the past year or so. For the year 2003 as a whole, the current account surplus was over 10 per cent of GDP, a figure that is high by both international standards and Hong Kong's historical experience. Specifically, in the third and fourth quarters of the year, it was 13.7% and 12.2% respectively. This probably explains why there was an abundant supply of foreign exchange in the second half of last year, requiring our creating Hong Kong dollars and taking in the foreign exchange, in accordance with the rule of the Currency Board system, to maintain exchange rate stability. Presumably, as a result of the economic recovery, which led to a faster growth of imports, the current account surplus as a percentage of GDP fell sharply to 5.2% and 2.4% respectively in the first and second quarters of this year.

An alternative way of interpreting the current account balance is that it equals the difference between domestic saving and investment. Thus the recent decline in the current account surplus reflects an increase in domestic consumption (and therefore a decline in domestic savings) and a rise in domestic investment. The drop in the surplus is indeed consistent with the national income account statistics, which indicate a rebound in consumption and investment in the first half of 2004. In the event this corresponded with a considerable reversal of the earlier inflow, which had also been encouraged by the interest rate differential between the US dollar and the Hong Kong dollar.

Whether or not Hong Kong's current account will move into deficit and the surplus Hong Kong dollar liquidity will be depleted remains to be seen. Other things being equal, this looks the likely course of events, but there are the rather large and unpredictable items in the capital account that can make things look very different, even if the current account moves into deficit. The associated flows of international funds in and out of our markets can easily overshadow the flows arising from current account activities. Indeed, just in the first half of this year the net outflow of portfolio investments was 11.5 times the current account surplus. And there are large changes in the other large items in the capital account, namely, direct investments and what are conveniently classified as other investments (reflecting largely changes in the external assets and liabilities of the banks, which can be generated by many unpredictable events).

Unfortunately there is a limit as to how far one, as economists or statisticians, can go into the balance of payments account without being intrusive into the confidentiality of those reporting the relevant information. It is in the nature of international finance that the more questions asked the faster the numbers will disappear altogether. But we at the HKMA will continue to try our best to make the most out of what is a set of very interesting but difficult statistics. This is essential to ensure that we are able to respond effectively to external financial shocks, and the financial system is able to cope with them.

 

Joseph Yam

18 November 2004

 

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