China's preliminary Q2 BoP

Basic balance turns negative (again), net FDI plummets

• China's BoP picture worsened substantially in Q2 as the basic balance worsened from $32bn the prior quarter to -$17bn (defined as net goods, services, FDI and equities; we exclude bond flows as these have most likely been FX-hedged in recent quarters).

This is extremely weak.

Except for Q1-2020, the basic balance has never been as negative. Having said that, it is broadly in line with the take-away from monthly BoP tracking, which has also flagged a deterioration in China's basic balance during Q2 (though perhaps with improvement in June).

One reason for the sharp decline is that net FDI fell very sharply, to a record -$86bn, down from -$28bn in Q1. Our monthly tracking had also been flagging a renewed deterioration in Chinese net FDI, though the scale of outflows via this channel far outstrips what our proxy implied; the difference between our monthly proxy (based on remittance data) and the BoP data was the largest on record. The decline was mostly driven by outbound FDI, which surged from $38bn to $71bn.

The outbound FDI data looks worrying as some view outbound FDI as a potential channel for capital flight. But its worth keeping in mind that Chinese firms are aggressively expanding their (legitimate) operations abroad (partly to evade sanctions by producing overseas) and this might have contributed to the widening outflows. What's more, Q4-23 and Q1-24 saw rather small outbound FDI numbers, making the Q2 Q/Q change seems large.

Breaking down the inbound FDI flows provides a more nuanced picture. Greenfield FDI has also fallen, but remains positive and within the historical range. The main driver of the large decline in inbound FDI flows have been repatriation of retained earnings.

The reserves numbers show substantial intervention, with FX sales adding up to $48bn, the largest since end-2016.

This intervention is broadly in line with the amount of money being transferred out of China (remittances) and helps make sense of how USDCNY has remained so stable amid substantial outflows: authorities have stepped in and provided FX liquidity for actors transferring money out of China.

We have been tracking the discrepancy between the BoP-basis and Customs-basis trade balance. The discrepancy surged from $60bn in Q1 to $86bn in Q2, the largest number on record.

Though highly preliminary (more so than usual given the large swings in this quarter's BoP), our estimate of the net errors and omissions (NEO, published in the final BoP) is -$36bn. That would be a large widening, though only back to 2022 levels.

If we add the Customs-BoP trade balance discrepancy to NEO, like we prefer to do, the adjusted NEO widened sharply from -$25bn to -$122bn. 

This brief commentary on China’s preliminary Q2 BoP data was shared with Exante Data clients in the hours after data was published.

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