strengthening their creditor position. In contrast, the Indian current account balance has returned to negative territory with a deficit of 1.5 percent in 2005 and projected deficits of 2.1 and 2.7 percent for 2006 and 2007, respectively, thus deepening their debtor position.

Compared with other developing countries, Figure 2 shows that China and India had at the end of 2004 net foreign asset positions that were less negative than is typically the case for countries at a similar level of development. This remains true today. Although some developing countries have more positive net positions, those typically are resourcerich economies.

In global terms, the imbalances of China and India are relatively small, as illustrated in Table 1. At the end of 2004, the Chinese creditor position amounted to only 7.4 percent of the level of Japanese net foreign assets (Japan is the world’s largest creditor nation), whereas Indian net liabilities were only 2.8 percent of U.S. net external liabilities (the U.S. is the world’s largest debtor nation). Scaled differently, China’s net creditor position of 131 billion dollars at the end of 2004 amounted to only 5 percent of the U.S. negative external position of $2.65 trillion.<sup>10</sup> However it is increasingly important on a flow basis: its projected 2006 current account surplus of $184 billion amounts to more than 20 percent of the projected U.S. current account deficit of $869 billion (IMF, World Economic Outlook database).

Underlying these net positions is a significant increase in the scale of China’s and India’s international balance sheets. Figure 3 shows the sum of foreign assets and liabilities (divided by GDP). This indicator of international financial integration has increased sharply for both countries in recent years, although the levels are not high when compared with other regions, as shown in the lower panels of Figure 3. Whereas the growth in cross-border holdings is substantial, Figure 4 shows that the relative pace of financial integration has lagged behind the expansion in trade integration and the growth in China’s and India’s share in global GDP.<sup>11</sup> There are significant asymmetries in the composition of the underlying stocks of gross foreign assets and liabilities. Table 2a shows the composition of foreign assets and liabilities for China and India. On the assets side, the equity position (portfolio and FDI) is relatively minor for both countries, with a predominant role for external reserve assets that amount to 31.8 percent of GDP for China and 18.3 percent of GDP for India at the end of 2004. On the liabilities side, the table also shows some important differences between the two countries. In particular, equity liabilities primarily take the form of FDI in China, whereas portfolio equity liabilities are predominant for India. External debt comprises less than one third of Chinese liabilities but more than one half in the Indian

> 10 These calculations are based on data drawn from Lane and Milesi-Ferretti (2006). In recent years, the major oil exporters plus other Asian economies have also run substantial current account surpluses. 11 See Lane and Milesi-Ferretti (2002) on the use of this measure as a volume-based indicator of international financial integration. The comparison of this measure of financial integration with the typical measure of trade integration shows interesting differences across countries. For example, Lane and MilesiFerretti (2006) find that, relative to the pace of trade integration, financial integration has proceeded more rapidly among the advanced nations than for the aggregate of developing countries.

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