--- Chinese Capital Account and Current Account

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Financial Market of China
--- Chinese Capital Account and Current Account
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• 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

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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.

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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
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• 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).

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Relationships between current account, capital
account and official reserve
Current Account Capital Account Change in
Official Reserve Account
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Part II

• Present Current account and capital account
  prevailing in China

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Chinas Balance of Payments Components,1994-2004
(USD billion)
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1. Current Account Surplus
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Reasons for the big float of Current Account
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
20012007 The increase rate of current account
(160.6-17.4)/17.4 824.1
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2. Capital Account Surplus
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• Figure2
• Chinas International Direct investment of
  capital inflows and outflows (1997-2003) Unit
  100million

Year 1996 1997 1998 1999 2000 2001 2002
Capital Inflows Capital Outflows Net Differences 417.3 21.1 -396.1 452.6 2.7 -449.9 454.6 28.2 -426.4 403.2 23.8 -379.4 407.2 22.4 -384.8 468.8 70.9 -397.9 535.05 20.87 -514.18

• Source from According to 2003 Chinese foreign
  economical trade yearbook
• 2004 Chinese commerce yearbook
  computation

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3. Official Reserve
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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 gt Low Cost
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Cumulative FDI
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2. Less domestic invest abroad

• 1. Chinas stage of development
• 2. Chinas 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.

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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

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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

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Part III
Forecast Capital Account

• Reasons for Our Forecasts
• Advantages of Our Forecasts Results
• Disadvantages of Our Forecasts Results

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The Volume of International Trade between China
with UK, USA and Mongolia
(Source World Trade Organization)
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Import and Export in the 10th Five-year Plan
Period
(www.stats.gov.cn/.../ t20060302_402308116.htm)
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RMB exchange rate to USD
2005/07/21 to 2007/03/12 Source
from The Peoples Bank Of China
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From the data and Charts above, there is big
pressure for RMB to appreciate, and lets look at
what would happen for the capital account.
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The appreciation of Chinese Currency will make
investment less attractive because of the
speculation reasons.
Adding
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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.
• gtIf 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.

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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.
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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.

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Explanation I Solow Model
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Worse off
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Explanation ? 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
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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.
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Explanation ? 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.
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Explanation ? Labour Market

• the cost of labour will increase.
• the opportunities provided will decrease.
• the unemployment rate will increase due to the
  above reasons.

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Explanation ? Aggregate Demand
Foreign investment decreases
Domestic interest rate decreases
Saving rate decreases
Domestic investment decreases
Less motivation for economic growth
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R
LM
R1
IS1
R2
IS2
Y
Y1
Y2
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• 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.

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Thank you for your attention!
Group Members Stella, Xu
Tony, Chen
Lucy, Zhang
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