In the past two years, the gap between the merchandise trade surplus data from the customs perspective and that from the balance of payments perspective in China has significantly widened. As shown in Figure 1, from 2019 to 2023, the merchandise trade surplus data from the balance of payments perspective in China has been lower than the trade surplus data from the customs perspective for five consecutive years. The differences between the two during the period from 2019 to 2023 were $28.1 billion, $12.9 billion, $73.9 billion, $172.9 billion, and $228.2 billion, respectively. In 2023, the aforementioned gap accounted for 38.4% of the merchandise trade surplus from the balance of payments perspective, which has attracted high attention from the international community.

According to some Western media interpretations, the Chinese government is deliberately underestimating China's merchandise trade surplus and current account surplus. In other words, Western media believes that China's balance of payments imbalance and overcapacity are much more severe than what the balance of payments data shows. However, is this really the case?

So far, the main explanations for the above gap include:

First, there is a significant difference in statistical principles between merchandise trade from the balance of payments perspective and customs imports and exports. The former mainly depicts the development of foreign trade from the perspective of the transfer of goods ownership, while the latter mainly depicts the development of foreign trade from the perspective of the cross-border movement of goods. In addition, the data included in the GDP expenditure method accounting is the merchandise trade from the balance of payments perspective.

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In recent years, it has become more common for the cross-border movement of goods and the transfer of goods ownership to be separated, mainly including three types of situations:

1. Global production arrangements such as "factory-free manufacturing" by multinational companies. This refers to multinational companies commissioning Chinese enterprises to manufacture and produce goods, which are then directly sold within China. That is, although the goods have not undergone cross-border movement, the ownership rights have been transferred across countries multiple times, and the retail price of the products after branding is much higher than the ex-factory price of Chinese manufacturing enterprises. The above transactions are not included in customs import and export statistics but are included in the balance of payments merchandise trade statistics;

2. The entry and exit of goods that do not involve the transfer of ownership rights, such as processing with provided materials and storage logistics services. For example, when the materials to be processed by processing enterprises enter the customs and the processed finished products exit the customs, the customs统计 the materials or finished products entering and exiting the country at their full value. However, since the ownership rights belong to foreign entities from entry to exit, they are not included in the balance of payments merchandise trade statistics;

3. The transfer of ownership rights occurring abroad. For example, the purchase and resale of goods in offshore spot transactions do not enter or exit customs, so they are not included in customs statistics. However, the change in ownership rights is included in the balance of payments merchandise trade statistics.

In addition, the pricing principles and bases during statistical accounting are also important sources of the above gap. For example, all goods transactions in the balance of payments statistics are on a free on board (FOB) basis, excluding the impact of freight and insurance costs. The customs statistics for imported goods are on a cost, insurance, and freight (CIF) basis, and the export prices are on an FOB basis.The above explanation is derived from the "China International Balance of Payments Report 2022," thus representing the official interpretation of the discrepancy between the two sets of data. However, whether the aforementioned explanation can adequately account for the widening gap in the past two years requires careful contemplation.

For instance, when multinational companies engage in contract manufacturing in China and sell the products directly within the country, this can lead to an increase in the deficit of goods trade under the balance of payments (an increase in imports).

Similarly, the processing trade can cause an increase in the trade surplus under the customs statistics (an increase in both exports and imports).

Furthermore, the transfer of ownership rights offshore can lead to an increase in the trade surplus under the balance of payments (an increase in both exports and imports).

Lastly, factors related to the pricing principles can result in a trade surplus under the customs statistics that is lower than the trade surplus under the balance of payments.

Therefore, for the aforementioned official explanation to successfully account for the sudden widening of the gap between the surplus or deficit of goods trade under the balance of payments and the trade surplus under the customs statistics in the past two years, one of the following conditions must be met: either the scale of contract manufacturing or processing trade by multinational companies has significantly increased in the past two years; or the benefits from the transfer of ownership rights offshore have suddenly turned into losses in the past two years. Currently, it seems difficult to find sufficient evidence to prove the above two points. In other words, the official explanation can roughly illustrate why there is a persistent deviation between the two sets of goods trade surpluses, but it seems difficult to explain the sudden magnification of the deviation in the past two years.

Secondly, against the backdrop of the continuous higher U.S. dollar interest rates compared to the renminbi interest rates, and the intensified depreciation pressure of the renminbi against the U.S. dollar, Chinese export enterprises choose to keep more export earnings abroad.

Since 2011, China has allowed enterprises to keep export earnings abroad within an approved scale. Starting from 2014, China has permitted enterprises to establish fund pools for netting settlements of the net amount of funds in and out of the country, allowing enterprises to independently decide whether to keep funds abroad.

An evidence for this explanation is that before 2015, China's trade surplus under the balance of payments had always been higher than the trade surplus under the customs statistics. However, from 2015 to 2023, in 7 out of the 9 years, China's trade surplus under the balance of payments was lower than that under the customs statistics. It is well known that the 811 exchange rate reform in 2015 intensified the market's depreciation expectations for the renminbi against the U.S. dollar.

Moreover, in recent years, with the rise in domestic systemic financial risk levels (such as local debt and real estate risks), and the intensification of international geopolitical conflicts, export enterprises have a stronger motivation to keep a higher proportion of export earnings abroad to avoid risks.Some viewpoints suggest that foreign-funded enterprises keep a larger amount of export profits abroad, and this disguised capital outflow can also be used to evade taxes. It is not ruled out that foreign capital may retain profits in China and allow them to flow out in this manner. For domestic private enterprises, the cost of keeping export income abroad is relatively high due to issues related to export tax rebates and capital turnover. In addition, they also face the risk of being scrutinized by the Common Reporting Standard (CRS).

Thirdly, some analyses have indicated that in recent years, with the rise of uncertainties both domestically and internationally, the net outflow of errors and omissions in China's balance of payments has significantly increased. To diminish the attention of relevant parties, the State Administration of Foreign Exchange (SAFE) has dispersed this deficit across various accounts when compiling the balance of payments, resulting in China's current account surplus and goods trade surplus being lower than the actual level.

However, this explanation is hard to support with empirical evidence, and it implies that SAFE would need to continuously adjust accounts, which is very cumbersome. Moreover, this explanation plays right into the hands of Western media.

Fourthly, some analyses have pointed out that some goods exported by Chinese companies to the Middle East and Russia may face large-scale deferred payment issues due to the lack of US dollars caused by financial sanctions imposed on these regions.

The author believes that this reason is unlikely to be the main cause of the continuous widening gap between the two口径 trade surpluses in recent years.

Fifthly, there are also views suggesting that some regions have issues with false exports and fraud in export tax rebates. For example, as soon as domestic goods enter the domestic export processing trade zones, they are considered as exports. However, some goods that enter these zones do not actually get exported but are instead returned to the country through various channels.

The author believes that the aforementioned explanations have a certain degree of rationality to them. However, in terms of the likelihood, the first two explanations seem to have a higher probability, while the last three explanations seem to have a lower probability.

Furthermore, we can analyze from another perspective by breaking down the difference in trade surpluses between the two口径 into the export and import sides. As shown in Table 1, from the above decomposition, the following three conclusions can be drawn: First, the gap on the export side constitutes the main part of the difference in trade surpluses between the two口径 in 2022 and 2023, for example, it can explain 88% in 2023; Second, in recent years, the scale of the export side gap has significantly increased, for example, from -100.2 billion US dollars in 2021 to -197.6 billion US dollars in 2022; Third, in recent years, the scale of the import side gap has significantly contracted, for example, from -103.5 billion US dollars in 2017 to -24.7 billion US dollars in 2022. In other words, the gap on the export side between the two口径 is continuously widening, while the gap on the import side is continuously narrowing, which is the direct cause of the widening gap in trade surpluses between the two口径.

From this perspective, among the three explanations provided by the official, the explanation of transnational companies "manufacturing without factories" and selling in China has less explanatory power, as it would lead to an increase in the import side gap between the two口径; the explanation of processing trade and logistics also has less explanatory power, as it would lead to a change in the same direction for both the export and import side gaps between the two口径; the explanation of offshore goods transshipment also has less explanatory power, as it would also lead to a change in the same direction for both the export and import side gaps between the two口径.

In comparison, the second, fourth, and fifth explanations can to some extent explain the characteristic fact that the export side gap between the two口径 is widening, but the import side gap is narrowing.Sixthly, "overpayment for imports" can also partially explain why the gap between the two口径s for imports has narrowed significantly. Behind "overpayment for imports" is the behavior of international trade companies transferring domestic funds abroad through transfer pricing.

Finally, it is worth pointing out that what deserves our high attention is the coexistence of "under-collection of exports" and "overpayment for imports" reflected in Table 1, resulting in the phenomenon of "surplus without collection". This reflects the large-scale outflow of domestic funds through trade channels, and the reasons behind it may be expectations of exchange rate depreciation and other uncertainties.