Trade figures may not be that relaible!

A Peking University professor has claimed that China is running a trade deficit. The Chinese government claims it is still running a huge trade surplus.

The Current Account surplus which people have generally believed China has been running is shown below from 1995.

The Current Account is made up of trade in goods and services, income and transfers. China has been thought to have a large surplus in goods and a smaller deficit in services.

A Current Account surplus implies an equivalent Financial and Capital Account deficit. However China does not allow the free transfer of capital. Therefore there can be a problem moving capital in or out of the country. The motive for controlling capital flows for China has a great deal to do with maintaining the exchange rate at the level they desire (a managed exchange rate).

Professor Balding is claiming there has been false accounting. Exporters overstating invoices to allow an inflow of capital into China in earlier years and now importers working to help capital flow out of China.

There are numerous issues here. Based on the fact the Balance of Payments must always balance (i.e. sum to zero) Professor Balding has found that China's trade performance has been overstated and the Chinese economy might not be doing as well as we thought. He has also given us an excellent example of how capital controls are only ever partially effective, someone always finds a way around them.

Forbes reports Professor Balding's findings here

IB students will find this article a good application of  the theory of the Balance of Payments and can use it to link to the performance of the real economy to the Current Account. VCE students will see how the Current and Financial accounts are linked.