Hong Kong unexpectedly overtook the U.S. in September as the top destination for Chinese shipments. Not everyone is convinced those flows were genuine.
Analysts at banks including Everbright Securities Co., Australia & New Zealand Banking Group Ltd. and Bank of Communications Co. said over-invoicing and over-reporting may explain the 34 percent surge in exports to Hong Kong from a year earlier.
A discrepancy between Hong Kong data for imports from China and Chinese figures for exports to the city in the past highlighted the practice of over-invoicing that’s used to disguise capital inflows to bet on China’s rising currency. China’s exports increased 15.3 percent from a year earlier, the biggest increase since February 2013 and beating the 12 percent median estimate in a Bloomberg survey of analysts, according to government data released yesterday, prompting deja vu for some.
“Signs of distortion might have re-emerged in the trade data,” Xu Gao, chief economist at Everbright Securities, said in a note yesterday. “If policy makers overestimate external demand due to these fake trade figures and reduce the efforts to stabilize growth domestically, the outlook for the economy will be very worrying.”
Xu, who formerly worked at the World Bank, pointed out the surge in exports included shipments of precious metals, which have been at the center of dodgy invoicing in the past. Government policies to support exports “seem to have stimulated fake exports instead,” he said.
The customs administration didn’t respond to faxed questions on speculation the September data was distorted. Hong Kong is scheduled to report September trade figures on Oct. 27, when the size of any discrepancy may become clearer.
Chinese stocks maintained declines after the data. The Shanghai Composite Index (SHCOMP) fell 0.4 percent at the close while the Hang Seng China Enterprises Index lost 0.2 percent.
After almost uninterrupted annual gains since 2005 that saw the yuan rise about 33 percent versus the dollar, speculators have come to see China’s currency as a one-way trade. That prompts hot money to seek out China on currency appreciation bets.
Worries about distortions had abated this year after a government crack down and as the yuan dropped 1.4 percent against the greenback in the first nine months of 2014.
The jump in exports to Hong Kong coincided with renewed appreciation of China’s currency, triggering “concerns that speculative trade flows to ride on RMB appreciation could have reemerged,” economists led by Liu Li-Gang at ANZ Bank wrote.
China’s currency appreciated 0.06 percent against the U.S. dollar last month -- the only emerging-market currency to advance against the greenback.
While China’s government has strict regulations on importing capital, those aiming to exploit yuan appreciation can evade the limit by disguising money inflows as payment for goods exported to foreign countries or territories, especially Hong Kong.
Companies have “faked, forged and illegally re-used” documents for exports and imports, Wu Ruilin, a deputy head of the State Administration of Foreign Exchange’s inspection department, said at a briefing in Beijing last month. The country has uncovered almost $10 billion in fraudulent trades nationwide since April last year.
The re-emergence of fake invoices might be attributed to the Shanghai-Hong Kong Stock Connect, which is set to be rolled out soon, attracting overseas capital, analysts at Bank of Communications led by Lian Ping said in a note yesterday.
Analysts at Goldman Sachs Group Inc. led by Song Yu saw a different possible explanation for the export surge: over-reporting as local governments strive to reach their growth targets. They noted there was no clear evidence of that.
Excluding the Hong Kong jump, exports growth held up largely unchanged at 12 percent, according to their calculation.