China's record capital-financial account gap in 2012

Last Updated: Sun, Feb 03, 2013 05:30 hrs

China last year had the biggest deficit in its financial and capital account since records began in 1982, as the domestic and global economies slowed, spurring outflows of funds. The $117.3-billion annual gap was the first since 1998 when investors deserted China during the Asian financial crisis and reversed a $221.1-billion surplus in 2011, according to data released on the State Administration of Foreign Exchange website yesterday. The excess in the current account, the broadest measure of trade, rose to $213.8 billion in 2012 from $201.7 billion the previous year.

The deficit may reflect reduced intervention by the central bank to control the yuan's exchange rate, which strengthened one per cent against the dollar in 2012, the least in three years. China's foreign-exchange reserves, rose the least since 2003 last year, as the economy expanded at the weakest pace since 1999. "This shows China's balance of payments is returning to a normal state," said Liu Li-Gang, head of Greater China economics at Australia & New Zealand Banking Group Ltd in Hong Kong.

"At the margin this will slow China's rapid reserve accumulation and reduce the pressures for the yuan to appreciate further."

China's foreign-exchange reserves increased by $128 billion to $3.31 trillion last year, data released by the central bank on January 10 showed. The US is among countries that have accused China of keeping its currency weak to promote exports.

Financial turbulence
The capital and financial account includes flows of funds for mergers and acquisitions, foreign direct investment, purchases and sales of equities and fixed-income securities and the central bank's reserve account used to buy and sell foreign currencies.

The foreign-exchange regulator, which is part of the central bank, said the deficit reflected outflows from weaker growth in China and worldwide as well as "more intensive international financial turbulence."

SAFE said in the statement that the gap reflected positive developments in "allowing people to hold foreign exchange," or decentralising holdings from the state to banks and the private sector.

Yi Gang, People's Bank of China deputy governor, said in October the central bank had reduced its intervention in the foreign-exchange markets, reflected by a leveling off in the nation's foreign-exchange reserves.

Quantitative easing
"If the PBOC stops intervention but the current-account surplus continues, then we should expect a capital-account deficit," said Huang Yiping, chief Asia economist with Barclays Plc in Hong Kong. While the nation still faces the risk of capital flight, with quantitative easing policies in developed economies and stabilizing growth in China "we might see more capital inflows this year."

Helen Qiao, chief Greater China economist at Morgan Stanley in Hong Kong, said the deficit "reflects a combination of growing enthusiasm for Chinese firms to invest overseas, weaker expectation for yuan appreciation and weaker growth at the lower part of a business cycle in China last year."

China's outbound investment surged 29 per cent to a record $77.2 billion last year while inbound spending dropped 3.7 per cent to $111.7 billion, commerce ministry data show.

Capital inflows
Qiao said SAFE's data release was incomplete and that a more detailed breakdown in March or April will provide a better indication of the cause of the gap.

Mark Williams, a London-based economist at Capital Economics Ltd. and a former China advisor to the UK Treasury, said recent data show increasing capital inflows, which "will be much stronger in the first half."

SAFE released the data after the close of markets in China. The benchmark Shanghai Composite Index rose 1.4 per cent to finish up 5.6 per cent for the week, the best weekly performance since October 2011.

The report showed China's current-account surplus as a percentage of gross domestic product fell to 2.6 per cent in 2012 from 2.8 per cent in 2011 and 10.1 per cent in 2007.

The IMF last year cut its estimate for the current-account- to-GDP surplus over the medium term to 4 per cent to 4.5 per cent from around 7.5 per cent, according to a report released in April.

The excess may decline to about 2 per cent of GDP this year while the capital-account deficit may narrow or swing to a surplus as investors' increasing willingness to take on more risk drives liquidity to emerging markets including China, Ding Shuang, a senior China economist with Citigroup Inc, said yesterday.

Citigroup estimates the yuan will appreciate to about 6.1 per dollar by the end of this year. The currency fell 0.13 percent yesterday to 6.2270 per dollar in Shanghai.

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