1. Balance of Payments Account
Census and Statistics Department

2. Outline of Presentation
Balance of Payments (BoP) - What is, and what is not
Structure of a BoP account and typical BoP transactions
Double-entry accounting system and examples of BoP transaction entries
BoP and National Income
Relationship between BoP imbalances, the foreign exchange market, exchange rate movements and reserve assets

3. International compilation standards and recommendations
Compilation of BoP account in HK follows international standards and recommendations established by the International Monetary Fund (IMF)

4. Balance of Payments (BoP):
What is and what is not?

5. From Economics Textbooks
BoP is

6. The report must involves:
a report on a country’s international performance in trading with other nations
The report must involves:
measurement of all the reasons why the country currency is supplied and demanded
i.e. an itemization of the factors behind the demand and supply of the currency
Maurice D.L. (1990) ‘International Finance’

7. From Compilation Standards
BoP is a statistical statement

8. mainly between residents and nonresidents
that systematically summarizes, for a specific time period, the economic transactions of an economy with the rest of the world
transactions
mainly between residents and nonresidents
involve goods, services, and income
involve financial claims on, and liabilities to, the rest of the world
transfers which involve offsetting entries to balance one-sided transactions
International Monetary Fund. (1996) ‘Balance of Payments Textbook’

9.  Residents of an Economy
 In compiling the BoP
account, it is necessary to
distinguish residents of an
economy from non-residents.

10. How Residents of an Economy are Defined?
 For individuals:
 normally stay in the economic
territory of the economy
 irrespective of their nationality
 For organizations:
 ordinarily operate in the economic
Residents of the mainland of China
are non-residents of HKSAR

11. Standard BoP sub-accounts :
‘Current account’
‘Capital and Financial account’

12. Current Account
Goods
General merchandise
Good for processing, repairs on goods and goods procured in
ports by carriers
Non-monetary gold
Services
Transportation
Travel
Other services
Income
Compensation of employees
Investment income
Direct investment income
Portfolio investment income
Other investment income
Current Transfers
General government
Other sectors

13. Capital and Financial Account
Capital Account
Capital Transfers
General government
Other sectors
Acquisition/Disposal of non-produced, non-financial assets
Financial Account
Direct Investment
Aboard
In reporting economy
Portfolio Investment
Assets
Liabilities
Financial derivative?
Other investment
Reserve Assets

14. Current account Covers all external transactions other than financial
offsets to one-sided provision / acquisition of economic values
Major components :
Goods and Services
Income
Current Transfers

15. Under BoP conventions Current account Credit Debit
Goods and Services exports imports
Income receivable payable
Current Transfers acquisition provision

16. Capital and Financial account
Major components
Capital account
Financial account

17. Capital account External transactions in Capital transfers
one-sided provision (donate/forgive) of
capital asset
financial asset linked to the acquisition or disposal of a capital asset
Non-produced, non-financial assets
(e.g. : patents, copyrights, licenses)

18. A transfer is a capital transfer when :
transfer in kind
transfer of ownership of a fixed asset
forgiveness of a liability by a creditor
transfer in cash
related to acquisition/disposal of a fixed asset (e.g. : investment grant)
But all transfers that are not transfers of capital are current transfers

19. conform with business and national accounting
Capital and Financial account
credit : net↓ in claims or other assets
net↑in liabilities
debit : net↑in claims or other assets
net↓in liabilities
conform with business and national accounting

20. Financial account
covers all transactions in the external financial assets and liabilities of an economy
External financial items ?
creditor
debtor }
But currency denomination of the item is irrelevant
residents of 2 different economies

21. external financial assets of an economy
claims on non-residents
holdings of
monetary gold
special drawing rights (SDR)
external liabilities
indebtedness to non-residents

22. Four broad categories of external investment
Direct investment (DI)
Portfolio investment (PI)
Other investment (OI)
Reserve assets

23. Financial account
changes in the holdings of ‘Reserve Assets’
BoP imbalances
official foreign exchange market intervention
other actions / influence

24. under the BoP framework
Double-entry
accounting system
under the BoP framework

25. Credit Debit
↓ in assets ↓ in liabilities
↑ in liabilities ↑ in assets

26. Double-entry accounting conventions used for compiling a BoP account

27. Under BoP convention (10.3.1.3)
each transaction is represented by two entries with equal values but in opposite sign
a credit (+)
a debit (-)

28. In principle
sum of all credit entries
= sum of all debit entries
net balance of all entries in BoP account
= 0

29. Example
* A HK resident imports
private cars worth HK$ 10Mn from Japan
HK$ Million
Credit Debit
Goods 10
Appropriate financial 10
account item

30. What is “Overall BoP Balance”?

31. BoP account must balance
current account deficit (surplus)
capital and financial account surplus (deficit)

32. Goods
Services
Income
Current Transfers
Capital Transfers
Direct Investment
Portfolio Investment
Financial Derivatives
Other Investment
Reserve Assets

33. In
practice
the accounts frequently do not balance
different BoP components are derived independently from different sources

34. In practice
BoP account ≠ 0
i.e. sum of all credit entries ≠
sum of all debit entries
BoP account made to balance by adding
“net errors and omissions”

35. standard
practice
use a separate entry to balance the account
net errors and omissions
= residual amount (reversed sign)

36. + + CURRENT ACCOUNT BALANCE
CAPITAL AND FINANCIAL ACCOUNT (NON-RESERVES) BALANCE +
NET ERRORS AND OMISSIONS
= OVERALL/MARKET BoP BALANCE
= RESERVE ASSETS NET CHANGE

37. Points to note :
1. BoP double-entry accounting system
capital and
financial account
balance
current
account =
In theory
Same magnitude
opposite sign
2. Any one transaction may have impact on more than one BoP sub-account

38. Example of BoP transaction entries (for the economy of Hong Kong)
Current Account transactions with their possible offsetting entries
Goods

39. A HK trader exports jeans to USA and extends a trade credit to the corresponding importer
Current Account Credit Debit
Goods xxxxx
Financial Account Credit Debit
OI-assets
Trade credits xxxxx

40. HK imports a number of private cars from Japan and payment is settled immediately by cash
Current Account Credit Debit
Goods xxxxx
Financial Account Credit Debit
OI-assets
Currency and deposits xxxxx

41. Services

42. A foreign traveler flying from HK by Cathay Pacific to USA
Current Account Credit Debit
Services
Transportation xxxxx
Financial Account Credit Debit
OI-assets
Currency and deposits xxxxx

43. A HK resident buys a life insurance policy from an insurance company in Canada
Current Account Credit Debit
Services
Insurance services xxxxx
Financial Account Credit Debit
OI-assets
Currency and deposits xxxxx

44. Income

45. Current Account Credit Debit Income DI income xxxxx
A HK company receives profit remitted by its branch company operating in mainland China
Current Account Credit Debit
Income
DI income xxxxx
Financial Account Credit Debit
Reserve assets xxxxx
(or other appropriate
financial account item)

46. Current Account Credit Debit Income PI income xxxxx
A foreign investor receives interests from HKMA for their investment in Exchange Fund Bills
Current Account Credit Debit
Income
PI income xxxxx
Financial Account Credit Debit
Reserve assets xxxxx
(or other appropriate
financial account item)

47. A bank in HK earns interests from lending a loan to a company in Indonesia
Current Account Credit Debit
Income
OI income xxxxx
Financial Account Credit Debit
OI-assets
Currency and deposits xxxxx

48. Current Account Credit Debit Income CE xxxxx
A computer company in HK employs a US computer expert to work in HK for 6 months receiving salary from the company
Current Account Credit Debit
Income
CE xxxxx
Financial Account Credit Debit
Reserve assets xxxxx
(or other appropriate
financial account item)

49. Current transfers

50. Current Account Credit Debit Current transfers
HK government donates money to a charitable organization in mainland China
Current Account Credit Debit
Current transfers
General government xxxxx
Financial Account Credit Debit
Reserve assets xxxxx
(or other appropriate
financial account item)

51. An imported worker in HK from mainland China was employed to work in HK for 2 years as a HK resident. During his stay in HK, he remits money to his relatives in mainland China
Current Account Credit Debit
Current transfers
Workers’ remittances xxxxx
Financial Account Credit Debit
OI-assets
Currency and deposits xxxxx

52. A HK student receives scholarship from a foreign educational foundation
Current Account Credit Debit
Current transfers
Other transfers xxxxx
Financial Account Credit Debit
OI-assets
Currency and deposits xxxxx

53. A HK resident received, from friends abroad, gifts of goods valued at a certain amount of money
Current Account Credit Debit
Goods
Current transfers
Other transfers

54. A HK resident received, from friends abroad, gifts of goods valued at a certain amount of money
Current Account Credit Debit
Goods xxxxx
Current transfers
Other transfers xxxxx

55. Capital Account : Capital Transfers
Capital and Financial Account transactions with their possible offsetting entries
Capital Account :
Capital Transfers

56. A company in USA donates a medical equipment to a charitable organization in HK
Current Account Credit Debit
Goods xxxxx
Capital Account Credit Debit
Capital transfers
Other sectors xxxxx

57. HK government forgives a loan extended to Thailand government a year earlier
Capital Account Credit Debit
Capital transfers
General government
Debt forgiveness xxxxx
Financial Account Credit Debit
OI-assets
Loans
General government xxxxx

58. A HK resident migrated to Canada and at the time of migration, he had a bank deposit in HK
Capital Account Credit Debit
Capital transfers
Migrant transfers
Financial Account Credit Debit
OI-liabilities
Currency and deposits

59. A HK resident migrated to Canada and at the time of migration, he had a bank deposit in HK
Capital Account Credit Debit
Capital transfers
Migrant transfers xxxxx
Financial Account Credit Debit
OI-liabilities
Currency and deposits xxxxx

60. Capital Account :
Non-produced and
Non-financial Assets

61. A company in HK sells a patent of toy design to a company in Japan
Capital Account Credit Debit
Acquisition/disposal of
NP, NF assets xxxxx
Financial Account Credit Debit
OI-assets
Currency and deposits xxxxx

62. A company in HK purchases the copyright of a film produced by a film producer in USA
Capital Account Credit Debit
Acquisition/disposal of
NP, NF assets xxxxx
Financial Account Credit Debit
OI-assets
Currency and deposits xxxxx

63. Financial Account :
Direct Investment

64. A firm in HK sets up a branch in Canada
A HK resident purchases a house in mainland China
Financial Account Credit Debit
DI abroad
Equity capital xxxxx
Financed by cash withdrawal :
OI-assets
Currency and deposits xxxxx
Financed by external borrowings :
OI-liabilities
Loans xxxxx

65. Financial Account :
Portfolio Investment

66. A US investor buys shares of a publicly listed company of HK
Financial Account Credit Debit
PI-liabilities
Equity securities xxxxx
Offsetting entry :
OI-assets
Currency and deposits xxxxx

67. A Japanese investor buys Exchange Fund Bills issued by HKMA
Financial Account Credit Debit
PI-liabilities
Debt securities xxxxx
Offsetting entry :
Reserve assets xxxxx

68. Financial Account :
Other Investment

69. A HK company borrows a sum of money from a bank in Singapore
Financial Account Credit Debit
OI-liabilities
Loans xxxxx
Offsetting entry :
OI-assets
Currency and deposits xxxxx

70. A HK importer makes a prepayment on import of a shipment of computers to an exporter in USA
Financial Account Credit Debit
OI-assets
Trade credits xxxxx
Offsetting entry :
Currency and deposits xxxxx

71. Financial Account :
Reserve Assets

72. HKMA acquires HK$ by selling ￡
Financial Account Credit Debit
Reserve assets
Foreign exchange
Currency and deposits xxxxx
Offsetting entry :
OI-assets
Currency and deposits xxxxx
(Banks)

73. HKMA acquires US Treasury Bills by selling HK$
Financial Account Credit Debit
Reserve assets
Foreign exchange
Securities xxxxx
Offsetting entry :
Portfolio investment-assets
Debt securities xxxxx
Notes P.12 Section

74. Meaning of BoP Imbalance?

75. The account must balance
BoP account is based on
double-entry bookkeeping
The account must balance
From Maurice D.L. (1990) ‘International Finance’

76. current account deficit (surplus)
(b) With flexible exchange rates : market balance
current account deficit (surplus)
capital and financial account surplus (deficit) =
Assumption : all deficit / surplus are correctly measured
From Maurice D.L. (1990) ‘International Finance’

77. [ ] 10.3.2.1(c) With fixed exchange rates :
increase (decrease) in official reserves
surplus (deficit) of [
‘capital and financial (non-reserves)’ accounts +
current accounts ]
From Maurice D.L. (1990) ‘International Finance’

78. 10.3.2.2 From compilation standard
BoP problem persistent
financial
outflows
loss of
reserve
assets
persistent current
account deficit

79. Read Wong (2000: 122) Point 3 10.3.2.2 Viable BoP deficit position
some
recourse to
reserve assets
deficit on private
goods and and
private services official
capital transfers
inflows
Read Wong (2000: 122) Point 3
International Monetary Fund (1993) ‘Balance of Payments Manual’

80. 10.3.3 BoP surplus Vs deficits: possible causes and implications

81. 10. 3. 3(1) BoP identity constitutes the budget
10.3.3(1) BoP identity constitutes the budget constraint for the entire economy
net provision of
resources to or from
change in net claims on
Rest of world

82. (2) Current account surplus (Outflow > inflow)
10.3.3
(2) Current account surplus
(Outflow > inflow)
increase in net claims on rest of world
Implies
in the form of official / private claims

83. { 10.3.3 (3) Current account deficit
net acquisition of resources from rest of world
implies
Paid for by
liquidating foreign assets or
increasing liabilities to
non-residents
(inflow > outflow) {

84. Changes in domestic saving relative
10.3.3(4) Changes in current account position
Changes in domestic saving relative
to investment
Any policy measures for altering current account balance
must affect domestic saving and investment behaviour & Y

85. spending > receipts
10.3.3(5) Government budgetary position: HK
spending > receipts
persistent
sustained
current account deficit

86. Is it necessarily bad for an economy to have a current account deficit?

87. No, what is important is the composition of the current account deficit
eg: if external borrowings generate
return > future interest or dividend payments
current account deficit is healthy and sustainable

88. The effect of increase or decrease in net
Y-line
E’ = C+I+G+(X-M)’
(a)
E = C+I+G+(X-M)
10.3.4a
The effect of increase or decrease in net
exports on national
income
45o Y0 Y1 Y E
Y-line
E = C+I+G+(X-M)
(b)
E’ = C+I+G+(X-M)’
45o Y2 Y0 Y

89. E E
Y-line
Y-line
E’ = C+I+G+(X-M)’
E = C+I+G+(X-M)
E = C+I+G+(X-M) M
E’ = C+I+G+(X-M)’
Trade deficit M X X
Trade surplus
45o
45o Y0 Y1 Y Y2 Y0 Y
(a)
(b)
10.3.4b
The effect of increase or decrease in national income on the current account 89