SAR stands aloof from this outflow of funds
Jake van der Kamp
To understand the conundrum which the mainland authorities face in their dismay that foreign reserves have stopped rising, one must start with a basic rule - the balance of payments always balances.
In simple terms, if a country has a current account surplus of 100 and a capital account deficit of 80, then people may say it has a balance of payments surplus of 20. In actual fact, however, that 20 flows out of the country as an increase in foreign reserves and everything balances out at 100 on both sides.
This means that it is easy to calculate foreign reserves from changes in the balance of payments. Just take the latest reported surplus or deficit, add it to the previous figure for foreign reserves and, allowing for some monthly wobbles on currency mismatches, you have the latest figure.
As the chart shows, there is a close match in the mainland between this way of calculating it and the actual foreign reserves from 1985 to 1997 after adjusting for a reclassification of reserves in 1992.
But then comes 1998. Full balance of payments figures are not yet available but the two major components have been reported. The merchandise trade balance for the first eight months ran at a record US$31.4 billion and foreign direct investment inflows of $20.4 billion for the first six months were only a fraction below the record level achieved at the same time last year.
All things being equal and with no major changes in the trend of the capital account, this should have pushed the balance of payments surplus up enough to keep foreign reserves rising at the same rate they did last year.
But it has not happened. The obvious reason is that some components of the capital account have seen big outflows which have not yet been tallied up. One clue lies in the 1997 figures which already then showed 'other investment' outflows rising in a single year from $1 billion to $34 billion.
Clearly, many mainland enterprises are worried that the yuan may be devalued and are shipping money abroad surreptitiously for conversion into US dollars or are keeping export receipts abroad when the rules require that they repatriate them. These practices have long existed but never on the scale to which they have grown this year.
The authorities do not require hard evidence in each case to know that it is happening. All that they need do, and are doing, is looking at their booming trade and direct investment surpluses and comparing these with their stagnant foreign reserves. It does not add up.
The resolution of this difficulty is likely to require more than simply ordering corporations to repatriate foreign exchange holdings by Thursday. Some will do it but others know full well that the authorities have evidence of the crime but not of the criminal.
Of more immediate importance, however, it is unlikely that Hong Kong will suffer from a sudden outflow of funds.
Just ask yourself one simple question. How many people believe that the HK dollar will not be affected by a devaluation in the mainland? Exactly. So when they want to hedge themselves against yuan currency risk they convert their yuan to US dollars. They do not jump from the frying pan into the fire by putting it into HK dollars.