What is BoP?

BoP is a statistical statement that systematically summarizes, for a specific period (typically a year or quarter), the economic transactions of an economy with the rest of the world. The international statistical standard for compiling such statistical statement is the Balance of Payments Manual (BPM) (the 5^th edition being the latest) published by the International Monetary Fund (IMF).

In principle, the net sum of credit and debit entries is zero. In practice, as the data are collected from many sources, discrepancies between the entries may occur for various reasons. Some transactions may even not be measured accurately or omitted. Equality between the sum of credit and debit entries is brought about by the inclusion of a balancing item which reflects net errors and omissions.

In compiling the BoP account, like in the compilation of other national accounts statistics, it is necessary to distinguish residents of an economy from non-residents. Practically speaking, residents of an economy include individuals and organizations. According to international statistical standards, for individuals, residents refer to those who normally stay in the economic territory of the economy, irrespective of their nationality; and for organizations, residents refer to those which ordinarily operate in the economic territory. Conceptually, the residence status of individuals and organizations in this regard depends on their centre of economic interest. The economic territory of an economy consists of the geographic territory administered by the government within which persons, goods and capital circulate freely.

The standard components covering goods, services, and income are to reflect the provision and acquisition of real resources by an economy to and from other economies. Flows recorded as credit measure the economy's domestic output (exports of goods and services) provided to other economies, as well as receipt of factor incomes arising from its factors of production (compensation of employees and investment income) used in the productive process in other economies. Conversely, flows recorded as debit measure the acquisition of output of other economies (imports of goods and services) and payment of factor incomes to other economies for the use of the latter's factors of production.

Current Transfers

Current transfers are those transactions in which an economy provides real and financial resources that are immediately or shortly consumed by other economies without receiving equivalent values in return. Examples are workers remittances sent or received by residents to or from non-residents, and donations or gifts given or received by the government to or from other government or non-residents.

Credit entries reflect offsetting entries to the receipts of such real or financial resources from other economies. Conversely, debit entries recorded are offsets to the provision of such real and financial resources to other economies.

A cash transfer is classified as current transfer except when it is linked to the acquisition or disposal of a fixed asset. For example, if a Hong Kong migrant disposes a real property in Hong Kong at the time of emigration and takes the cash so arising to the new economy he migrates, such cash will be classified as migrant transfers under capital transfers which will be described later under Capital and Financial Account.

Current transfers, and transactions in real resources, have a direct and immediate effect on an economy's pattern of consumption in any specified period.

(b) Capital and Financial Account

Capital Account

The capital account measures external transactions in capital transfers (mainly debt forgiveness and migrant transfers) and non-produced / non-financial assets (such as patents and copyrights).

A capital transfer is a transfer of ownership of a fixed asset or forgiveness of a liability. For example, Economy A extends a loan to Economy B in a given period, and later on agrees to write off ('forgive') the loan. The forgiveness of such a loan is recorded under capital transfers.

Financial Account

The financial account shows how an economy's external transactions are financed. Transactions in this account are classified into direct investment, portfolio investment, financial derivatives, other investment and reserve assets.

(i) Direct Investment

Direct investment refers to external investment in which an investor of an economy acquires a lasting interest and a degree of influence or control over the management of an enterprise located in another economy.

External investment in real estate, as specified in BPM, is also a form of direct investment. If a Hong Kong resident owns real estate outside the economic territory of Hong Kong, he should be regarded as owning a nominal company in the economy in question which in turn owns the real estate. The relationship between such nominal company and legal owner of the land and structures is then treated as a direct investment relationship.

(ii) Portfolio Investment

Portfolio investment refers to investment in non-resident equities (i.e. stocks and shares) and debt securities (e.g. bonds, notes, negotiable certificates of deposits). Compared with direct investors, portfolio investors in equity and debt securities of non-resident enterprises have no lasting interest or influence in the management of the companies they invest. A holding of less than 10% equity in an enterprise is regarded as portfolio investment.

(iii) Financial Derivatives

Financial derivatives are financial instruments that are linked to a specific financial instrument or indicator or commodity, and through which specific financial risks can be traded in financial markets in their own right (e.g. options, warrants).

(iv) Other Investment

Other investment refers to other financial claims on and liabilities to non-residents that are not classified as direct investment, portfolio investment, financial derivatives, or reserve assets. Examples of these financial claims and liabilities include short-term and long-term non-marketable loans, deposits, financial leases and trade credits.

(v) Reserve Assets

Reserve assets consist of external assets that are readily available to and controlled by monetary authorities of an economy (in the case of Hong Kong, the Hong Kong Monetary Authority) for directly financing payment imbalances and for indirectly regulating the magnitude of such imbalances through intervention in the exchange markets to affect the currency exchange rate of that economy.

BoP Surplus or Deficit

For a reference period, if an economy receives more foreign currencies than it pays in external transactions in goods, services, income and assets, as well as in external transfers and remittances, then it is said to have a BoP surplus, which is equal to its overall net inflow of funds from the rest of the world. Conversely, there will be a BoP deficit which is equal to its net outflow of funds.

Main Uses of BoP Statistics

BoP data are important for monetary and financial monitoring and policy deliberations in both territorial and international contexts. Such data are useful for analytical studies on income growth, external orientation of the economy, relationships between trade in goods and services and direct investment flows, links between the exchange rate and the Current and Financial accounts, international banking transactions, assets securitisation and financial market developments, external debt situation, and so on. Some examples are given below :-

 

a)	Data on current transfers, when combined with Gross National Product (GNP), will enable the compilation of gross national disposable income for Hong Kong, which should be a very useful measure of aggregate income for analysing changes in consumption and savings.
b)	Data on external investment flows (direct investment, portfolio investment, financial derivatives and other investment) will provide a macroeconomic database to support economic analysis on many important issues like economic growth, productivity change, industrial efficiency and financial structures.
c)	A complete BoP account will help discern the various forces in the foreign exchange market affecting the external exchange value of the Hong Kong dollar, and the supply of foreign exchange in Hong Kong's financial system. Such information will be useful for analysing money supply and demand using econometric techniques, and for analysing aggregate domestic demand and inflation from the monetary side.

February, 2001