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Seminar on Balance of Payments for Secondary Economics Teachers (Part II)

This seminar provides insights on major differences between the BPM5 and BPM6 on goods and services accounts, along with illustrative examples and their impact on Hong Kong. It also discusses the background, previous international standards, and new international standards for balance of payments.

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Seminar on Balance of Payments for Secondary Economics Teachers (Part II)

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  1. Seminar on Balance of Payments for Secondary Economics Teachers(Part II) 20 May 2011 1

  2. Today’s rundown • Major Differences between the BPM5 and the BPM6 on goods and services account • Background • Previous International Standards • New International Standards • Illustrative Examples • Impact on Hong Kong • Dissemination Plan 2

  3. Background 3

  4. Background Structural change in Hong Kong’s external trade • 1960-70’s: Hong Kong’s external trade mainly comprised merchandise trade • 1970’s: globalization + the open-door policy  Remarkable development in trade in goods (outward processing) • 1990’s: Rapid infrastructural development (ports and transportation facilities in particular) in mainland China  Remarkable development in trade in services (merchanting)  Structural shift to a serviceseconomy 4

  5. 2009 Exports of services Merchanting 26% Imports of goods Exports of goods Involving Goods for Processing 17% Involving Goods for Processing 23% Background Significant shares of trade in goods and services related to outward processing and merchanting 5

  6. Background Outward processing trade of Hong Kong in the mainland of China 6

  7. Background Exports of Merchanting Services from Hong Kong 7

  8. Previous International Standards 8

  9. Previous International Standards Under BPM5, Goods for processing • Data of goods account primarily come from external merchandise trade statistics compiled based on trade declarations lodged to HK Customs • Record all physical movements of goods at the time they cross the boundary of Hong Kong, but not at the time of change of ownership • “Goods for processing” (EX of raw materials/ semi-manufactures to the processing economy & the subsequent IM of the processed goods) are included in external merchandise trade statistics • A change of ownership is imputed and recorded on gross terms under the goods account  an exception of the “change of ownership” principle 9

  10. Previous International Standards Under BPM5, Merchanting • Another exception to the “change of ownership” principle • Sales of goods - Cost of goods sold = Gross margin = Exports of merchanting services • Collected from an annual establishment survey 10

  11. New International Standards 11

  12. New International Standards In the Global Statistics Forum 2011, Hubert Escaith, the Chief Statistician of the WTO said, “ …the world has been changing quite fast lately and things are not done, produced and traded the way they used to be 50 years ago. In the old times, you had large plants making everything from A to Z, from design to production, even transportation. Everything was done in the same plant, in the same country, so when it was exported, when you had “made in UK”, for example, on a label, you knew that everything came from England.” “Today large companies are organized according to what we call supply chain, global value chains, where in fact all these processes which before took place in one roof is now fragmented across the world. So some parts come from Sweden, others from China, Japan or Korea.” 12

  13. New International Standards In the Global Statistics Forum 2011, Hubert Escaith, the Chief Statistician of the WTO said, “Everything is made in the world.” “ …the old measure or the traditional measure gives a wrong figure about bilateral trade flows and when you have the wrong figure you may take the wrong decision. I guess you Americans say you may be barking at the wrong tree.” 13

  14. New International Standards • The fifth edition of the Balance of Payments Manual (BPM5) was released in 1993 by the International Monetary Fund (IMF) • To address development in the international economy in the past decade or so (e.g. globalization, financial innovation), the IMF initiated an updating process of the BPM5 in 2003 • After several years of extensive work, including a worldwide review of the draft new manual, the IMF published the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6) in December 2008 • The BPM6 also harmonises with other manuals, notably the System of National Accounts 2008 (2008 SNA) 14

  15. New International Standards No more exceptions to the “change of ownership” principle: • Goods for processing: • Imports and exports of goods involved in processing without a change of ownership to be excluded from trade in goods • The payment of processing fees to the processing economy would be recorded as imports of services • Merchanting: • The acquisition of goods abroad for “merchanting” would be recorded as imports (shown as negative exports) of goods by the economy where the trader resides • The subsequent resale of goods would be recorded as exports of goods from that economy • Merchanting will notbe included as exports of services 15

  16. New International Standards How to define a “change of ownership”? • Economic ownership takes account of where the risks and rewards of ownership lie. A change in ownership from an economic point of view means that all risks, rewards, and rights and responsibilities of ownership in practice are transferred. • Rewards: the right to use, rent out, or otherwise generate income, or to sell the asset. Every economic asset has demonstrable value, functioning as a store of value that reflects the amounts of the economic benefits that its owner can derive by holding it, using it, or providing it temporarily to another entity. It may be tangible or intangible. • Risks: the potential losses caused by damage, theft, and holding losses; that management, transfer, or maintenance costs are greater than anticipated; and, in the case of financial assets, default of the counterparty. Ownership may be subject to costs such as maintenance and taxes. 16

  17. Illustrative Examples 17

  18. 20 processing fee  imports of services Illustrative Examples A simplified outward processing trade flow (USD million) 1. Raw materials provided by HK to China(80) China Hong Kong 2. Finished goods returned to Hong Kong (100) Current situation﹕ 100IM of goods 80EX of goods New standard﹕ 100deducted from IM of goods 80deducted from EX of goods 18

  19. 2. The goods sold under merchanting were delivered from Taiwan to the US directly without passing through Hong Kong. Taiwan US 3. Hong Kong received 300 from the US for the sales of goods. 1. HK paid 280 to Taiwan for the cost of goods procured. Hong Kong 4. Hong Kong earned a gross margin of 20. Illustrative Examples A simplified merchanting trade flow (USD million) Current situation﹕ 20EX of merchanting services 280not included in IM of goods 300not included in EX of goods New standard﹕ 20not included in EX of merchanting services 280included in IM of goods (-ve EX of goods) 300included in EX of goods 19

  20. Impact on Hong Kong 20

  21. Impact on Hong Kong • Exports of goods ↑ or ↓? • Imports of goods ↓ • Balance of trade in goods: deficit surplus • Exports of services ↓ • Imports of services ↑ • Balance of trade in services: surplusdeficit • No net effect on the balance of goods and services! 21

  22. Dissemination Plan 22

  23. Dissemination Plan • Conventional merchandise trade statistics will continue to be compiled • To serve a variety of needs e.g. forecast of infrastructural facilities • A supplementary set of trade in goods and trade in services statistics based on the “change of ownership” principle under the BPM6 will be compiled starting from 2012 for the reference period 2011 • To facilitate macroeconomic analysis, international comparison and trade negotiations • E.g. iPod study • Bridge tables explaining the gaps between the two sets of figures will be provided 23

  24. References 24

  25. References • The sixth edition of the Balance of Payments and International Investment Position Manual http://www.imf.org/external/pubs/ft/bop/2007/bopman6.htm • Balance of Payments Committee http://www.imf.org/external/pubs/ft/bop/2008/21.htm http://www.imf.org/external/pubs/ft/bop/2007/20.htm • iPod study http://escholarship.org/uc/item/1770046n 25

  26. References 21/F., Wanchai Tower, 12 Harbour Road, Wan Chai, H.K. C&SD Publications Unit, Wan Chai gen-enquiry@censtatd.gov.hk 2582 5073 2827 1708 26

  27. Hong Kong Statistics About C&SD Press Releases Latest Hong Kong statistics and charts Press releases available by 5:00 p.m. on the date of release Service Desk Web Links Publications & Other Statistical Products E-mail enquiries & contact Links to international organizations and other statistical authorities C&SD Website (www.censtatd.gov.hk) 27

  28. Thank you! 28

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