The (Somewhat) Mysterious Surge in China’s Current Account Surplus

In the second quarter of 2024, China reported a customs surplus of $250 Billion, a services deficit of $60 billion—and a current account surplus of only $50 billion. The gap between the current account estimated from the customs and services data and the reported current account balance was almost $140 billion.*

In the first quarter of 2025 China reported a customs surplus of $250 billion, a services deficit of $50 billion or so—and a current account surplus of $165 billion.  The gap fell to about $35 billion dollars.

The net effect of the adjustments to the adjustments that China makes to transform its customs data into its current account data has been a surge in the reported surplus, which topped $500 billion in four quarters through q1.  That’s a real change from the (clearly too low) $200 billion surplus China was reporting a year ago.

 

As the chart above shows, China’s trade balance is rising.  The rise in the current account surplus exceeds the change in the trade balance. Something else is at work; that is the puzzle at the center of this blog.

Let me take a step back.

Back in 2021, China changed the methodology used to calculate its current account surplus (China told the IMF the change was fully phased in starting 2022, but it appears in the data for 2021). Now, SAFE wasn’t exactly transparent about how it had changed the methodology. For a while it was about free trade zones and commodity trade, etc. Now it is all about the use of onshore contract manufacturing by offshore firms: “The methodological difference is particularly relevant in the recording of imports and exports related to global production arrangements (e.g., factoryless manufacturing) where nonresident enterprises (e.g., multinational enterprises) outsource part of production to contractors in China.” (Appendix VII).

What was apparent was that the methodological shift had significantly reduced China’s reported current account surplus. That surplus had generally tracked the goods data (as the customs to balance of payments data was based on the customs data) and the services data before COVID, and with the shift in methodology it stopped tracking — as the following chart shows.

In the summer of 2024 SAFE released (through the IMF) more detail about its methodological shift, which it argued corresponded to the IMF’s latest (BPM7) guidance for calculating goods trade in the balance of payments.**

And it is possible to see the impact of the shifts in a chart comparing the the new reported balance of payments data with an estimate of that the balance of payments data would like using China’s 2015 to 2020 methodology (which can be estimated statistically)

Exports dipped below what they could have been under the old methodology.

And “balance of payments” imports, which should be smaller than customs imports because the cost of insurance and freight is moved over to the services balance, were higher than they would have been under the old approach. 

The combined effect was a big reduction in the reported goods surplus relative to the customs balance.

A close up shows that the adjustment has shifted a bit recently.  Exports are no longer being adjusted down as much, increasing the reported balance of payments goods surplus.   Imports are still being adjusted up relative to the 2015-2020 methodology.

 

China, through the IMF in a critical statistical appendix, has made three arguments justifying the new approach, and the lower reported current account surplus:

1. Exports were overstated in the customs data, as Chinese contract manufacturers producing goods for foreign customers (Hon Hai, producing for Apple) reported their exports at the “global wholesale price” not the price they actually received. That never made sense (Hon Hai wouldn’t know the global wholesale price for the phones it produces) and it hasn’t checked out—smartphones for the U.S. market (the majority of which are iPhones—probably around 80 percent) enter into the customs data at between $350 and 375 a phone, or just over $400 for an iPhone given that Lenovo (via Motorola) produces a few phones in China for the US market.  That is roughly the cost of production of an iPhone 15, an iPhone 16  or an iPhone 16 pro plus Hon Hai’s margin (iPhone 15s were the bulk of Apple’s 2024 US sales); there is no evidence in the smart phone trade that the customs value of China’s exports has been systematically inflated (and China hasn’t pointed to any other large sector as a plausible source for the discrepancy)
2. The balance of payments data was adjusted to include in balance of payments goods the production of goods like an iPhone that were produced in China for the Chinese market (the “sold in China” adjustment laid out in Appendix VII).  As a result of this adjustment, the profit that firms like Apple make by hiring Hon Hai to manufacture for the Chinese market would enter into the Chinese balance of payments data as a goods deficit (think of Apple Ireland as an old fashioned sailing ship, picking up the phone from the “Apple City” bonded zone, adding a markup, and delivering the iPhone to the Apple store in Shanghai***). Fair enough, that is indeed how contract manufacturing for a non-resident company should enter into balance of payments data if the IMF’s balance of payments manual is followed strictly (China basically exports phones and then it reimports them at a higher price in the balance of payments, even though the phone physically never leaves China and never enters into the customs data). This adjustment however should not impact the current account, as it should just move Apple’s onshore profit (always a debit in the current account) out of services (royalties) or income (the profit of apple’s Chinese subsidiary) and into goods. It isn’t clear whether the IMF understood this or asked for evidence that China was making the offsetting adjustments. What is clear is that China’s balance of payments data isn’t detailed enough to allow any third party to determine if China is doing the adjustment correctly.****
3. China indicated that it was using an internal payments dataset (“the Chinese BOP compilers switched the data sources from Customs data to direct reporting of financial records by large enterprises in 2022”) to calculate the balance of payments deficit in goods using the BPM7 “transfer of value” principle. This put the IMF in a bind: on one hand, China claimed it was implementing the IMF’s guidance for goods trade; on the other hand, there is no way for any outside party to now know how SAFE is generating its data, as SAFE’s internal payments data is, naturally, not something that they release publicly.

The net effect was—unsurprisingly—a reduction in the transparency of China’s balance of payments data. It was easy to back out the old customs-to-balance of payments adjustment with the old methodology: the cost of insurance and freight was moved out of goods imports and into services imports, raising the BOP goods surplus relative to customs, and there was a modest downward adjustment in exports. But with the new methodology, anything goes.

It’s now clear that the customs-to-BOP goods adjustment has not been constant over time. It was something like $100 billion in Q2 2024. It fell to something like $35 billion in Q1 2025. Apple’s pricing didn’t radically change, so there is no obvious reason for this swing based on what China told the IMF last summer. It just happened.

No matter.

China’s reported surplus has soared from around $50 billion a quarter/$200 billion a year to a more reasonable $150 billion a quarter/$600 billion a year.

I suspect that China is adjusting the current account surplus to keep reported errors (now called the statistical discrepancy) low. Errors basically disappeared for no obvious economic reason at the same time that China introduced its new balance of payments methodology.

 

Swings in the financial account thus could help explain why the reported current account surplus has surged.  China’s banks have been adding to their foreign assets rapidly over the last three quarters for some reason, and that, plus the FDI outflow, required a larger current account surplus under a “zero errors” model (more recorded financial outflows requires a larger offsetting current account surplus).

But who really knows?

What’s clear is that the reported current account surplus jumped up, and is now running at or above $600 billion quarter.  And the jump didn’t occur just because the underlying trade surplus jumped up.

The IMF should be a bit embarrassed. Their forecasts of China’s surplus use the old (downwardly biased) data and missed the jump.

But the larger reported surplus makes it easier for the IMF to justify its new focus on trade imbalances, and hopefully to focus that effort on China rather than on Japan (which now has a goods deficit) or Europe (which has a tiny surplus in goods if Ireland’s transfer price-driven surplus in pharmaceuticals is removed from the data).

There is one more, critical point.  Even with the recent adjustments to the adjustments that have increased China’s reported surplus, China’s surplus is still significantly understated.

Before 2021, the balance of payments surplus tracked to the customs surplus plus the tourism balance (or the services balance).  That methodology would put the surplus over the last four quarters of data at $850 billion, well above the $550 billion in the data.  Add a reasonable return—say, the 3 percent that SAFE disclosed making on its reserve from 2011 to 2020—to China’s net international investment position and the surplus should be more like $950 billion.

Yes, FDI returns do tend to be higher, but China no longer has a big negative “stock” position in FDI. The net international investment position (NIIP) for end 2024 has $3.1 trillion in outward FDI versus $3.6 trillion in inward FDI.  That generates a modest $500 billion gap.  For more importantly, the NIIP  shows $4 trillion more in interest-receiving assets than in interest-paying liabilities. A sophisticated adjustment should also reflect the relatively high returns that China’s banks should be getting on their short-term lending and on the state banks LIBOR-linked loans.

All said, I suspect China’s surplus is substantially higher than it now reports — $200-250 billion a quarter, not $165 billion.

But the numbers are no longer as egregiously off as a year ago.

Maybe Xi just concluded that a deflated surplus made China look weak and vulnerable, and that wasn’t the image he wanted to convey going into the trade war?

That probably goes too far, but it is hard to rule anything out so long as China’s reported current account surplus appears to be a policy variable rather than an economic fact.

 

* China reports an income deficit of around $40 billion a quarter, which is itself bizarre. But that in no way explains the $140 billion gap.

** Never mind that China doesn’t meet BPM5 or BPM6 standards for reporting on its income balance or its financial account; the goods data was about the last thing that China needed to fix in the balance of payments.

*** Apple enters into Ireland’s balance of payments data through the goods side, as a “merchanting” export in the balance of payments goods data that has no corresponding customs entry.

**** The relevant appendix (VII) in the IMF staff report did not mention any adjustments to other parts of the balance of payments, and SAFE doesn’t appear to have explained how it offset the change on the “import” side of the goods balance of payments (Table 1, Appendix VII).