China Facing First Deficit Since 1992

China will likely post in the second quarter its first balance of payments deficit since 1992.

China is sending more money out than it is bringing in.? The gobbling up of dollars by the main banks in the country has waned. Total net foreign exchange purchases by China?s financial institutions (including the People?s Bank of China) rose by 23.4 billion renmimbi in May, but fell in dollar terms by $53.5 billion due to a depreciating currency. In April and May combined, net dollar purchases fell by $51.2 billion. The second quarter looks to be only the second quarter since 2000 ? when these data were first compiled ? that net forex purchases fell in dollar terms. The first time was Q4 2000.

Nomura Securities analyst Rob Subbaraman said on Tuesday that, ?Assuming no change in net forex purchases by China?s financial institutions in June?China will record a Balance of Payment?s deficit of $13 billion in the second quarter, its first once since 1992.?

Given that China?s trade surplus widened from $0.9 billion in the first quarter to $37.1 billion in April and May combined, it seems fair to surmise that, if China does record a BoP deficit in the second, it will be caused by net capital outflows as China?s major banks slow their acquisitions of dollars in the market, Subbaraman said.

An imbalance in a nation?s BoP means payments made by the country exceed payments received by the country. A BoP deficit can be viewed as a negative by the markets. Often, an unequal flow of currency reduces the supply of money in the nation and can lead to an increase in the exchange rate relative to the dollar, leading to inflation and, in a worst case, labor market pressures leading to unemployment.

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