First Insights: China: First annual capital account deficit since 1998

First Insights: China: First annual capital account deficit since 1998

China’s capital account recorded a deficit of US$117bn in 2012, the first capital account deficit since 1998. Net FDI inflows rose slightly to US$180bn in 2012 from US$179bn in 2011, but were offset by net portfolio and other financial outflows.

The current account surplus reached US$214bn, slightly up from USD201.7bn in 2011. As a share of GDP, the current account dipped to 2.6% from 2.8% in 2011. The current account surplus was completely driven by a trade surplus of US$233bn. Other items in the current account (service trade, income and transfer) all registered deficits.

China’s FX reserves grew by US$98.7bn in 2012 and US$34.7bn in Q4 (excluding valuation and the exchange rate effect) – suggesting capital outflows of US$82.7bn in Q4, which declined from US$109bn in Q3.

This set of data reinforces our view that China’s reserves are close to its peak (see China’s peaking FX reserves, 29 May 2012). We expect China’s capital account deficit to widen in 2013 as net FDI inflows will likely decline – China’s competitiveness to attract FDI has weakened due to higher factor prices such as wages, and outward FDI is set to rise as Chinese companies expand overseas. The current account surplus is also likely to fall as domestic demand outpaces external demand and commodity prices rebound.

Economists
Zhiwei Zhang