Why Did China’s Current Account Surplus Surge in the Third Quarter?

China’s reported current account surplus rose from $55 billion in the second quarter of 2024 ($220 billion annualized, or just over a percentage point of GDP) to $148 billion (just under $600 billion annualized, or close to 3.5 percent of GDP) in the third quarter.

What’s more puzzling is that there is no obvious reason why the current account surplus should have basically tripled.

The customs goods surplus was constant at around $250 billion a quarter.

The services deficit was constant at around $60 billion a quarter.

So the roughly $100 billion rise in the reported current account surplus is absolutely not explained by variation in the main drivers of the current account.

China’s income deficit is a black box, as China provides no underlying detail—and the income deficit, which was quite large in Q2, did fall by $25 billion or so.

But that $25 billion swing only accounts for about a quarter of the change in the reported current account.

Mechanically, the surplus fell because the relationship between the goods surplus in the balance of payments and the goods surplus in the customs data mysteriously changed yet again. Yep, China’s goods surplus (in the customs data) doesn’t consistently line up with China’s goods surplus (in the balance of payments). The balance of payments number was a lot closer to the customs number in Q3 than it was in Q2.

This is where there just might be a connection to the global carry trade unwind of early August 2024.

Let me see if I can explain the theory, which at this stage is just a theory. The full balance of payments data won’t be out for another few weeks, and China hasn’t really provided much of an explanation for the methodology it supposedly uses to calculate the goods balance in the balance of payments.*

And, well, this all gets rather complicated.

Recall the yen’s rally in August, and the associated rally in the yuan.

That had a clear impact on China, particularly on the state banks. FX settlement turned massively positive in September. All told the state banks added $70 billion to their net foreign assets in Q3, after several quarters of sales or no growth.

That meant that the financial account would not have balanced with the small current account surplus reported in Q2 (to be clear, I think the reported surplus in the four quarters through Q2 2024 was enormously understated).

In the second quarter, the $55 billion current account surplus was offset by FDI outflows. Actually it was more than offset by a $80 billion net FDI outflow, with the gap covered by a nearly $50 billion fall in reserves. The two sides of the balance of payments were in rough equilibrium, with reported financial outflows mapping to the smaller reported current account surplus; errors were low; indeed, errors have recently been suspiciously low.

What would have happened if the current account surplus had stayed at $55 billion in Q3 (as one might expect with unchanged customs goods surplus and no change in the services balance)? 

Well, FDI outflows fell to $40-45 billion, so a low-balled current account number could explain a $10-15 billion increase in the net foreign asset position of the state banks—but not a $70 billion increase (there was also a $25-30 billion fall in reserves in the balance of payments data, which offsets some of the swing in the foreign asset position of the state banks).

So if one of China’s goals is now to minimize reported errors—as the State Administration of Foreign Exchange (SAFE) hinted in its discussions with the IMF—it effectively needed to increase the current account surplus.

And since SAFE never has convincingly provided the math and numbers that justify the big gap between the goods number between the customs and balance of payments data, and that adjustment is all based on internal payments data and a survey, it would be easy to change the “goods” number.

At least that’s one theory.

The bigger point, of course, is this: there is no way China’s current account surplus in Q2 should have been $200 billion when the customs goods surplus is $1 trillion (investment income should also be in surplus, given current U.S. rates) and the service deficit is around $250 billion. There is equally no plausible reason why the surplus suddenly jumped to near $600 billion in Q3.

In my view, China just (albeit indirectly) admitted its current account data is now made up.**

Hopefully it is something that the IMF seriously investigates in its next surveillance cycle. 

Burying the most important issue for the global economy—China’s balance of payments surplus—in an appendix that appears to have been largely just a summary of what SAFE told the IMF team won’t cut it.

* Paul Krugman is doing his bit to make economic blogging great again—putting out speculative work in progress, not the more polished material that became the new normal for blogs over time (as Twitter temporarily took over the more speculative and informal discussion). This blog hopefully adds to that trend. I cannot prove that the rise in net foreign asset position of the state banks prompted China to report a much bigger current account surplus than would have been expected given its new “BoP” methodology and the underlying customs data. It is just a hunch.

** There was a mysterious swing in the monthly surplus in the “Balance of Payments, Goods” series for September that caught my attention, with the monthly number for balance of payments exports exceeding the monthly customs number for no obvious reason. I think it turned out to be a signal that something was up.