The surplus will be smaller than last year's because of an expected shrinkage in export volume stemming from a worldwide economic slowdown, the report said.

Despite the shrinkage, SAFE asserted that the surplus will lead to continuous growth of China's foreign exchange reserves and reinforce the reminbi's stability, a prediction that has also been made by top economic officials. The trade sector affects mainly the current account of an economy's international payment positions.

China recorded a surplus of US$20.5 billion last year on the current account mostly because of strong export growth.

Fund flows in the form of direct investment, investment in securities and loans - both into China and out of China - affect the capital and financial account. Combined development of the current account and the capital and financial account drives changes in a nation's balance of international payments.

China's pending entry into the World Trade Organization triggered surging direct foreign investment last year and helped the country post a surplus of US$1.9 billion in the capital and financial account.

SAFE pointed out in the report that the balance sheet also reflects aspects of China's economy that need improvement. The country continued to post deficits in service sector trade, which forms part of the current account.

China expanded surpluses in telecommunications, information services and advertising, but continued to be in the red in construction, finance, insurance and audio products. According to the report, the figures are a reflection of China's status as a developing economy.

SAFE said the situation will not change overnight, which means China's deficit in services trade will likely continue. The SAFE report paid special attention to a significant drop in the capital and financial account surplus. The US$1.9 billion surplus in the account represented a 75 percent decrease over the previous year despite a surge in foreign direct investment and funds raised by Chinese firms through share flotation overseas.

The main reason, according to the report, was that Chinese companies borrowed less from foreign lending institutions but put more into foreign financial institutions in 2000 compared with the previous year.

SAFE predicted the capital and financial account will achieve a zero balance in 2001

(China Daily 05/15/2001)