Money go round

Real or imagined?

In the southern city of Shenzhen, business manager Liu Zhengwen says the situation is so dire that it “feels like 2008”.

So perhaps it’s no wonder that people are turning to unconventional practices to make money.

“A friend in my industry just visited me and talked about forging documents to make money,” Liu told Bloomberg. “I didn’t want to take the risk.”

The fear is that others are happier to break the law to such an extent that it is distorting crucial macroeconomic data for the country at large.

The latest trade numbers to come out of China showed a 14.7% year-on-year increase in exports in April. On the surface that looked reassuring, suggesting potentially higher GDP growth for the full year.

But look into the details that underpin the headline figure and there are some unusual results. Most notably, there was a 55% year-on-year jump in exports to Hong Kong last month, while the increase in China’s trade with other countries averaged a much less exciting 12%.

Similarly, as Caijing reports, exports to Taiwan rose 49.2% in April to $4.26 billion, according to official data. But Taiwan’s own trade numbers show imports from the mainland actually falling 2.7% year-on-year, to $3.57 billion.

The explanation for these kind of anomalies can be traced to an illicit practice that allows businesses to avoid capital controls and bring speculative funds into China disguised as trade flows. The trick is quite simple. The foreign subsidiary of a company on the Chinese mainland borrows money overseas. It then sends the cash into China in the form of a payment for traded goods, even if the goods themselves have not necessarily changed hands.

The incentive is to bring funds into China to chase higher yields. At the most basic level, this is interest rate arbitrage. In Hong Kong, the interest rate on a one-year deposit ranges from 2.25% to 2.5%, while in mainland China, the one-year rate is 3.25%. In addition, the strong performance of the renminbi against the dollar in recent weeks suggests that the yuan’s appreciation trend is very much on track. If it continues, it will add to the profits from the trade.

But the interest rate spread is small, which means that returns will be meagre unless a large amount of capital is involved. To get access to more funds, companies are trading the same goods over and over again to get the paperwork used to obtain loans from abroad.

Day trips between Shenzhen and Hong Kong – where the goods are moved back and forth – are one way of doing this. But there are more practical methods too. In some free trade zones, goods don’t have to physically leave the country at all, as traders can get the paperwork completed by shifting products between warehouses marked for export and import.

One company in Shenzhen’s Futian Free Trade Zone confessed to CBN that it had helped a customer import and export the same batch of rubber 41 times in the first three months of the year.

While the exports might be fake, they have a very real impact on the trade statistics. The Financial Times is reporting that China’s 18% year-on-year growth in exports in the first quarter could be exaggerated by as much as five percentage points when hot money flows are taken out. Reuters estimates that as much as $181 billion worth of speculative capital could have flooded into China in the first quarter.

Earlier this month, the State Administration of Foreign Exchange announced that companies would be blacklisted “if they are unable to explain discrepancies between the value of their commercial trading and the underlying amount of goods actually moved,” reports the FT. “This is clearly a sign that the authorities recognise that companies chanelling inflows into China dressed up as exports is actually a serious issue, that it is happening and that they want to do something about it,” an economist told the newspaper.

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