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Contents of the release

Hong Kong's detailed Balance of Payments (BoP) accounts, for 1998, 1999, and the four quarters of 1999, are released for the first time by the Census and Statistics Department today(June 19).

A BoP account is an integrated statistical statement of an economy's external transactions with the rest of the world. The detailed BoP account released here contains detailed breakdowns for both the current account as well as the capital and financial account.

While the broad BoP account has been compiled since the reference year of 1997, this is the first time that the full BoP account with complete breakdowns of capital and financial flows is compiled and released.

In compiling and presenting the detailed BoP account of Hong Kong, the international standards prescribed in the Fifth Edition of the Balance of Payments Manual of the International Monetary Fund (IMF) are adopted. It is also in compliance with the Special Data Dissemination Standard (SDDS) of IMF, to which Hong Kong has subscribed.

Overall Situation

In 1999, Hong Kong recorded a BoP surplus amounting to $74.1 billion, equivalent to 6.0% of GDP. This was in contrast to a BoP deficit of $53.8 billion, or 4.2% of GDP, in 1998.

Of the major BoP components, the current account surplus widened markedly to $72.0 billion (5.8% of GDP) in 1999, from $22.5 billion (1.8% of GDP) in 1998. At the same time, there was a net inflow of financial non-reserve assets of $11.7 billion (0.9% of GDP) in 1999, in contrast to a net outflow of $65.6 billion (5.2% of GDP) in 1998.

Analysed by quarter, there was a sustained BoP surplus throughout the four quarters of 1999, with the surplus increasing markedly in the third quarter and even more so in the fourth quarter. Apart from the distinct improvement in the current account surplus in the second half of 1999 upon the sharp rebound in exports of both goods and services, the turnaround in financial flows back to a net inflow towards the year-end also contributed to the marked rise in BoP surplus in the fourth quarter.

Current Account

The current account recorded a surplus of $72.0 billion in 1999, significantly up from the surplus of $22.5 billion in 1998. The large current account surplus in 1999 was characterised by a much reduced visible trade deficit, a marked increase in invisible trade surplus, continued net inflow in the factor income account, and continued net outflow in current transfers.

On the visible trade account, the deficit narrowed significantly further, from $60.7 billion in 1998 to $24.5 billion in 1999. This was the combined result of the strong rebound in Hong Kong's exports of goods upon the improved regional and global economic environment and the slack in retained imports reflecting the modest domestic demand for most of the year.

With exports of services rising on the back of improved regional demand but imports of services still falling amidst a weak local demand, the invisible trade surplus surged to $80.7 billion in 1999, from $66.7 billion in 1998. Within the overall surplus for 1999, there was a net surplus of $41.2 billion for transportation services, a net deficit of $49.2 billion for travel, and a net surplus of $88.6 billion for trade in other services (including insurance services, financial services and trade-related services).

Taken together, the combined visible and invisible trade surplus rose markedly to $56.2 billion in 1999, from $6.1 billion in 1998. The rise in surplus was particularly huge in the second half of 1999, accounting for over three-quarters of the rise for the year as a whole.

The factor income account continued to record a relatively small net inflow of $27.3 billion in 1999, comprising external factor income inflow and outflow at $366.9 billion and $339.6 billion respectively. The net inflow in 1999 was broadly similar to that of $28.8 billion in 1998, as the increase in net outflow of direct investment income in 1999 was largely offset by the improvement in net inflow of portfolio investment income and other investment income.

Transfers relate to the provision or receipt of real resources or financial items without a quid pro quo (i.e. without the receipt or provision of an equivalent economic value in return). Outflow of current transfers comprises mainly workers' remittances to family members residing outside Hong Kong, while inflow comprises mainly such remittances in the opposite direction. In 1999, there was a current transfer outflow of $16.9 billion and an inflow of $5.5 billion, resulting in a net outflow of $11.4 billion. In 1998, there was a larger net outflow of $12.4 billion.

Capital and Financial Account

Detailed component breakdowns for the capital and financial account are available for the first time for Hong Kong.

The net outflow of capital transfers was estimated at $13.8 billion in 1999, as compared to $18.5 billion in 1998. Capital transfers mainly include transfers of migrants, which are mostly related to change in the value of external financial claims associated with real properties owned by migrants. The remaining part of migrants' transfers comprise household effects and cash holdings.

In 1999, there was an overall net inflow of financial non-reserve assets of $11.7 billion, in contrast to an overall net outflow amounting to $65.6 billion in 1998. Analysed by quarter, financial non-reserve assets still recorded a net outflow in the first three quarters of 1999, but switched back to a large net inflow in the fourth quarter of 1999 as improved economic environment and market sentiment attracted a robust inflow of portfolio investment funds into Hong Kong.

The overall net inflow of financial non-reserve assets in 1999 was the combined result of a net inflow of $24.6 billion in direct investment (DI), net inflow of $250.5 billion in portfolio investment (PI), and cash settlement of financial derivatives leading to a net inflow of $95.5 billion, which more than offset a net outflow of $358.9 billion in other investment (OI).

On direct investment flows, outflow of funds under DI rose to $154.3 billion in 1999, from $131.5 billion in 1998. This was possibly due to the sharp rebound in the regional economies which attracted Hong Kong companies to make more DI abroad. There was however a withdrawal of DI from abroad at $11.2 billion in the fourth quarter of 1999. This was mainly caused by a large repayment of intercompany debt by non-resident direct investment enterprises to parents in Hong Kong, and a withdrawal of equity capital resulted from some significant acquisition and merger activities taking place in that period.

Yet inflow of funds under DI increased to an even greater extent, from $114.4 billion in 1998 to $179.0 billion in 1999. These inflows of DI funds were mainly in the form of reinvested earnings, which accounted for over half of the total DI inflow into Hong Kong in 1999. The distinct turnaround in local economic activity could have induced a greater amount of reinvestment of the earnings into Hong Kong.

On portfolio investment flows, both PI assets and PI liabilities increased markedly in 1999, upon improved market sentiment locally and in the region which led to significant rises in both the inflow of PI into Hong Kong and outflow of PI to the regional and other overseas stock markets. With PI assets rising by $197.6 billion and PI liabilities increasing even more, by $448.1 billion, there was a huge net inflow of PI funds amounting to $250.5 billion in 1999, as compared to $171.1 billion in 1998.

On PI assets, the increase in 1999 was mainly due to increased holdings of overseas equity securities assets by residents amounting to $226.2 billion. This contrasted sharply with a liquidation in both equity securities and debt securities assets amounting to $197.4 billion in 1998.

As to PI liabilities, the large investment inflow in 1999 was also mainly in equity securities amounting to $456.6 billion, with the inflow being particularly huge in the fourth quarter of 1999. This was also in stark contrast to a reduction in equity securities and debt securities liabilities of $26.4 billion in 1998.

On other investment flows, both OI assets and OI liabilities declined significantly further in 1999, by $327.0 billion and $685.9 billion respectively. The combined result was a net outflow of OI funds amounting to $358.9 billion in 1999, as against a net outflow of $245.1 billion in 1998. For both OI assets and liabilities, the contraction in 1998 and 1999 was partly due to the marked contraction in Euroyen Impact Loans booked in Hong Kong.

Reserve assets in the BoP account reflect the net change in Hong Kong's foreign currency assets, which come under the management of the Hong Kong Monetary Authority (HKMA). In 1999, reserve assets increased markedly by $74.1 billion, indicating an overall BoP surplus of the same amount for the year. This reversed the situation in 1998 when a reduction in reserve assets amounting to $53.8 billion was recorded. The rise in reserve assets was particularly significant in the fourth quarter of 1999. It was partly attributable to foreign currency proceeds from increased banknote issues during the Y2K critical period and the disposal of part of the Government held Hong Kong equity portfolio through the Tracker Fund in November 1999.

Commentary

A Government Secretariat spokesman noted that Hong Kong's BoP position switched back to a distinct surplus in 1999, after incurring a deficit in 1998 caused by the profound shocks from the Asian financial turmoil. Hong Kong's reserve assets correspondingly surged in 1999. The turnaround in BoP position last year was underpinned by a marked increase in current account surplus upon the recovery in regional demand, as well as resumed inflows of funds into Hong Kong as the local economic situation and sentiment improved further towards the year-end.

Further information

Table 1 gives the BoP account by standard component. Table 2 gives the detailed BoP current account analysed by the sub-account component, while Table 3 gives the detailed capital and financial account analysed by its sub-account component.

The present BoP estimates for 1998, 1999 and the four quarters of 1999 are only preliminary, and are subject to revision when the estimates on individual components are updated upon availability of more data.

Detailed BoP account for the first quarter of 2000 will be available by September 2000, and that for the second quarter of 2000 by November 2000. As from the third quarter of 2000 onwards, quarterly BoP accounts will be disseminated with a time lag of less than one quarter after the end of the reference quarter. This will adequately meet the timeliness requirements of the Special Data Dissemination Standard (SDDS) of IMF.

End/Monday, June 19, 2000

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