Introduction

This paper extends the analytical framework developed by Kueh and Voon（1997）for reconciling the bilateral trade balance claims between China and the United States. The background to the problem involved is familiar：goods which are manufactured in the Chinese hinterland by or on behalf of Hong Kong manufacturers（or Sino-HK joint ventures）based in China and then exported by way of the HKSAR to the US，are treated in the official US statistics as Chinese exports to the US. This has clearly boosted the volume of US imports from China. Moreover，the same US practice also regards Hong Kong as the final destination for all its exports to the SAR regardless of whether or not the goods have been re-exported to the Chinese Mainland. The upshot is grossly exaggerated US trade deficits with China.

From China’s perspective，however，goods produced by Hong Kong’s manufacturers in China for exports by way of Hong Kong to the final US destination should not be included in official Chinese statistics as exports to the US. The Chinese authority regards these as export-processing for Hong Kong customers，as the necessary input materials are normally supplied from Hong Kong sources（which may involve PVC from Japan or cotton yarn from Pakistan）. As a matter of fact，the Hong Kong government has，since 1989，compiled a full set of statistics for such “outward-processing”（OP）exports to and imports from China，in light of the accelerated relocation of Hong Kong manufacturing plants to the Chinese hinterland to take advantage of low labour and land rental costs across the border.

The different Chinese statistical practice has clearly helped to further widen the gap between the US and China with respect to their conflicting trade balance claims. Both