The renminbi conundrum: the external surplus and the exchange rate

China’s current account has defied consensus, and recorded a surplus of 1.6% of GDP in Q2 2019, up from a 1.5% surplus in Q1. How can that be? The answer must lie in the financial and capital accounts, where outflows overwhelm inflows from the basic surplus (the sum of current account flows and net foreign direct investment (FDI) flows). This rose to 1.8% of GDP in Q2 2019 from 1.6% in Q1.