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Analysis: $58Bln Hot Money Channeled into Mainland From Hong Kong Disguised as Trade Payments

05-10 13:18 Caijing
Details of April trade report and anecdotal evidence have prompted many to believe that China's trade data was significantly inflated by companies fiddling their invoices to bring funds onshore to chase yield.

Alleged distortions on China's export data may have dented hopes for markets starved for upbeat Chinese data, with analysis showing speculative capital inflows disguised as trade payments could hit 58 billion U.S. dollars.

Details of April trade report and anecdotal evidence have prompted many to believe that China's trade data was significantly inflated by companies fiddling their invoices to bring funds onshore to chase yield.

Official data showed Wednesday that April exports grew by 14.7 percent from a year earlier, beating a market consensus of 9.2 percent gain and March's 10.0 percent increase.

Exports to Taiwan rose 49.2 percent to $4.26 billion in April, the customs said, while Taiwan data indicates imports from the Chinese mainland fell 2.7 percent year-on-year to $3.57 billion.

Government data also suggests export growth to Hong Kong hit 69.2 percent in the January-April period, well above the growth rate of 5 percent to the United States, which is odd considering Hong Kong's status as an entrepot for trade with the mainland.

"The widening divergence has in fact emerged accompanied by the rapid appreciation of the yuan since late last year, as well as the wide use of yuan trade settlements in Hong Kong, suggesting abundant cash flows into the mainland disguised as trade payments," according to an analysis carried by the state-run China Securities Journal.

Declining oversea orders at the latest Canton Fair, the world's largest trade show, also served as an evidence of weak global demand at odds with strong Chinese export growth.

The problem remains now is that by how much the trade data was distorted.

Assume China's export growth to Hong Kong was normal last year, cash flows disguised as trade payments into the mainland could reach around 58 billion U.S. dollars so far this year, accounting for 8.3 percent of overall export, according to a calculation by the China Securities Journal.

The analysis also factors into export price, exchange rate, global demand and domestic production costs to conclude that real export April export growth may be at roughly 7.54 percent.

The State Administration of Foreign Exchange (SAFE) introduced for the first time a minimum net open position in US dollars, restricting banks' capacity to lend in the greenback.

The regulator also said it will increase scrutiny of importers and exporters who channel in money disguised as trade bills, effective June 1.

On Thursday, the People's Bank of China auctioned 10 billion yuan ($1.6 billion) of three-month bills, a move interpreted by market for the central bank as a changed monetary strategy to fend off inflows of speculative capital. The central bank has not issued bills - which drain liquidity in tenors between three months and three years - since 2011.

"The new regulations will, undoubtedly, make exporters harder to over-invoice trade value for arbitrage," the State Securities Journal analysis said, "While hot money inflows embedded in trade will slow over time, China's export growth will also fall into a more reasonably range."

 

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