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

2. Census and Statistics Department 2 Todays 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

3. Census and Statistics Department 3 Background

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

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

6. Census and Statistics Department 6 Background Outward processing trade of Hong Kong in the mainland of China

7. Census and Statistics Department 7 Background Exports of Merchanting Services from Hong Kong

8. Census and Statistics Department 8 Previous International Standards

9. Census and Statistics Department 9 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 Previous International Standards

10. Census and Statistics Department 10 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 Previous International Standards

11. Census and Statistics Department 11 New International Standards

12. Census and Statistics Department 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.

13. Census and Statistics Department 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.

14. Census and Statistics Department 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)

15. Census and Statistics Department 15 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 not be included as exports of services New International Standards

16. Census and Statistics Department 16 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. New International Standards

17. Census and Statistics Department 17 Illustrative Examples

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

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

20. Census and Statistics Department 20 Impact on Hong Kong

21. Census and Statistics Department 21 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! Impact on Hong Kong

22. Census and Statistics Department 22 Dissemination Plan

23. Census and Statistics Department 23 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 Dissemination Plan

24. Census and Statistics Department 24 References

25. Census and Statistics Department 25 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 References

26. Census and Statistics Department 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

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

28. Census and Statistics Department 28 Thank you!