Seminar on Balance of Payments for Secondary Economics Teachers (Part II)

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Seminar on Balance of Payments for Secondary
Economics Teachers(Part II)

• 20 May 2011

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Todays rundown

• Major Differences between the BPM5 and the BPM6
  on goods and services account
• Background
• Previous International Standards
• New International Standards
• Illustrative Examples
• Impact on Hong Kong
• Dissemination Plan

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Background
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Background

• Structural change in Hong Kongs external trade
• 1960-70s Hong Kongs external trade mainly
  comprised merchandise trade
• 1970s globalization the open-door policy
• ? Remarkable development in trade in goods
  (outward processing)
• 1990s Rapid infrastructural development (ports
  and transportation facilities in particular) in
  mainland China
• ? Remarkable development in trade in services
  (merchanting)
• ? Structural shift to a services economy

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Background
Significant shares of trade in goods and services
related to outward processing and merchanting
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Background
Outward processing trade of Hong Kong in the
mainland of China
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Background
Exports of Merchanting Services from Hong Kong
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Previous International Standards
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Previous International Standards

• Under BPM5, Goods for processing
• Data of goods account primarily come from
  external merchandise trade statistics compiled
  based on trade declarations lodged to HK Customs
• Record all physical movements of goods at the
  time they cross the boundary of Hong Kong, but
  not at the time of change of ownership
• Goods for processing (EX of raw materials/
  semi-manufactures to the processing economy the
  subsequent IM of the processed goods) are
  included in external merchandise trade statistics
• A change of ownership is imputed and recorded on
  gross terms under the goods account ? an
  exception of the change of ownership principle

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Previous International Standards

• Under BPM5, Merchanting
• Another exception to the change of ownership
  principle
• Sales of goods - Cost of goods sold
• Gross margin
• Exports of merchanting services
• Collected from an annual establishment survey

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New International Standards
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New International Standards
In the Global Statistics Forum 2011, Hubert
Escaith, the Chief Statistician of the WTO
said, the world has been changing quite fast
lately and things are not done, produced and
traded the way they used to be 50 years ago. In
the old times, you had large plants making
everything from A to Z, from design to
production, even transportation. Everything was
done in the same plant, in the same country, so
when it was exported, when you had made in UK,
for example, on a label, you knew that everything
came from England. Today large companies are
organized according to what we call supply chain,
global value chains, where in fact all these
processes which before took place in one roof is
now fragmented across the world. So some parts
come from Sweden, others from China, Japan or
Korea.
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New International Standards
In the Global Statistics Forum 2011, Hubert
Escaith, the Chief Statistician of the WTO
said, Everything is made in the world.
the old measure or the traditional measure gives
a wrong figure about bilateral trade flows and
when you have the wrong figure you may take the
wrong decision. I guess you Americans say you
may be barking at the wrong tree.
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New International Standards

• The fifth edition of the Balance of Payments
  Manual (BPM5) was released in 1993 by the
  International Monetary Fund (IMF)
• To address development in the international
  economy in the past decade or so (e.g.
  globalization, financial innovation), the IMF
  initiated an updating process of the BPM5 in 2003
• After several years of extensive work, including
  a worldwide review of the draft new manual, the
  IMF published the sixth edition of the Balance of
  Payments and International Investment Position
  Manual (BPM6) in December 2008
• The BPM6 also harmonises with other manuals,
  notably the System of National Accounts 2008
  (2008 SNA)

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New International Standards

• No more exceptions to the change of ownership
  principle
• Goods for processing
• Imports and exports of goods involved in
  processing without a change of ownership to be
  excluded from trade in goods
• The payment of processing fees to the processing
  economy would be recorded as imports of services
• Merchanting
• The acquisition of goods abroad for merchanting
  would be recorded as imports (shown as negative
  exports) of goods by the economy where the trader
  resides
• The subsequent resale of goods would be recorded
  as exports of goods from that economy
• Merchanting will not be included as exports of
  services

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New International Standards

• How to define a change of ownership?
• Economic ownership takes account of where the
  risks and rewards of ownership lie. A change in
  ownership from an economic point of view means
  that all risks, rewards, and rights and
  responsibilities of ownership in practice are
  transferred.
• Rewards the right to use, rent out, or otherwise
  generate income, or to sell the asset. Every
  economic asset has demonstrable value,
  functioning as a store of value that reflects the
  amounts of the economic benefits that its owner
  can derive by holding it, using it, or providing
  it temporarily to another entity. It may be
  tangible or intangible.
• Risks the potential losses caused by damage,
  theft, and holding losses that management,
  transfer, or maintenance costs are greater than
  anticipated and, in the case of financial
  assets, default of the counterparty. Ownership
  may be subject to costs such as maintenance and
  taxes.

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Illustrative Examples
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Illustrative Examples
A simplified outward processing trade flow
(USD million)
1. Raw materials provided by HK to China (80)
China
Hong Kong
2. Finished goods returned to Hong Kong (100)
Current situation? 100?IM of goods 80?EX of
goods
New standard? 100?deducted from IM of goods
80?deducted from EX of goods
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Illustrative Examples
A simplified merchanting trade flow
(USD million)
Current situation? 20?EX of merchanting
services 280?not included in IM of goods 300?not
included in EX of goods
New standard? 20?not included in EX of
merchanting services 280?included in IM of goods
(-ve EX of goods) 300?included in EX of goods
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Impact on Hong Kong
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Impact on Hong Kong

• Exports of goods ? or ??
• Imports of goods ?
• Balance of trade in goods deficit ? surplus
• Exports of services ?
• Imports of services ?
• Balance of trade in services surplus ? deficit
• No net effect on the balance of goods and
  services!

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Dissemination Plan
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Dissemination Plan

• Conventional merchandise trade statistics will
  continue to be compiled
• To serve a variety of needs e.g. forecast of
  infrastructural facilities
• A supplementary set of trade in goods and trade
  in services statistics based on the change of
  ownership principle under the BPM6 will be
  compiled starting from 2012 for the reference
  period 2011
• To facilitate macroeconomic analysis,
  international comparison and trade negotiations
• E.g. iPod study
• Bridge tables explaining the gaps between the two
  sets of figures will be provided

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References
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References

• The sixth edition of the Balance of Payments and
  International Investment Position Manual
• http//www.imf.org/external/pubs/ft/bop/2007/bopma
  n6.htm
• Balance of Payments Committee
• http//www.imf.org/external/pubs/ft/bop/2008/21.ht
  m
• http//www.imf.org/external/pubs/ft/bop/2007/20.ht
  m
• iPod study
• http//escholarship.org/uc/item/1770046n

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References

• 21/F., Wanchai Tower, 12 Harbour Road, Wan Chai,
  H.K.
• CSD Publications Unit, Wan Chai
• gen-enquiry_at_censtatd.gov.hk
• 2582 5073
• 2827 1708

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CSD Website (www.censtatd.gov.hk)
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Thank you!