Weekend Long Read: Making Sense of China’s Controversial Trade Surplus Data

In recent years, there has been a growing discrepancy between China's goods trade surplus figures based on customs data and balance of payments (BOP) data. This gap has significantly widened from $28.1 billion in 2019 to $228.2 billion in 2023, a difference that has drawn considerable international attention [para. 1].

Western media have speculated that the Chinese government might be underreporting its trade surplus and current account surplus, indicating more severe trade imbalances and overcapacity issues than officially claimed [para. 5]. However, various explanations for this discrepancy have been proposed [para. 6].

**Statistical Differences**: The primary explanation stems from differences in statistical methodology. BOP data calculate foreign trade based on ownership transfer of goods, while customs data are based on the physical movement of goods across borders. BOP data also contribute to GDP calculations, which consider global production arrangements like contract manufacturing by multinational corporations, where ownership changes occur without cross-border movement. Similarly, processing, warehousing services, and offshore transactions impact BOP figures without appearing in customs statistics [para. 7][para. 10].

Additionally, pricing principles differ: BOP uses free-on-board (FOB) pricing, while customs use cost, insurance, and freight (CIF) for imports and FOB for exports. These differences lead to variations in recorded trade surpluses [para. 12].

While these factors explain a persistent divergence between data sets, they do not fully account for the recent amplification of this gap. It’s suggested that either contract manufacturing or processing trade has significantly increased, or profits from offshore trades have plummeted, but evidence for these conditions is lacking [para. 16].

**Exchange Rate Factors**: Another explanation involves exchange rate pressures. With U.S. interest rates being higher and the yuan under depreciation pressure, Chinese exporters are likely keeping more of their earnings overseas. This trend has been noticeable since 2015 when the central bank reformed exchange rates, causing the BOP-based surplus to usually be lower than the customs-based surplus [para. 20][para. 22].

**Errors and Omissions**: Increasing domestic and international uncertainties have also led to substantial net capital outflows recorded as "net errors and omissions." This has led to discussions about the authorities distributing discrepancies across various accounts to play down concerns, although this explanation lacks empirical evidence [para. 29].

**Delayed Payments and Fraud**: Lastly, some analysts suggest that delays in payments for goods exported to sanctioned countries and misreporting for export tax rebate fraud could contribute to the discrepancies. However, these factors are less credible than the first two explanations [para. 31][para. 34].

The breakdown of trade surplus discrepancies shows that export data discrepancies were the primary driver of the widening gap in recent years, accounting for 88% of the surplus gap in 2023. While the export gap grew substantially, the import gap shrank, indicating contrasting trends in the two data sets for imports and exports [para. 36][para. 39].

The official explanation of multinational companies' contract manufacturing does not fully account for these trends, as it would typically widen the import gap. Similarly, processing and offshore ownership transfers would typically cause aligned changes in both export and import gaps, making the second, fourth, and fifth explanations more plausible for these trends [para. 43].

**Overpayment for Imports**: Shrinking discrepancies in import statistics could also be due to overpayment for imports, hinting at domestic funds being moved overseas [para. 48].

In summary, the discrepancies between China's trade surplus figures from BOP and customs data likely reflect substantial capital outflows driven by uncertainties, including expectations for yuan depreciation. These factors distort the trade surplus data and point to underlying economic motivations and strategies [para. 50].