Until now, Beijing’s monthly import and export numbers have been considered absolutely reliable, yet there is growing evidence to suggest that in recent months they have been distorted by fabricated transactions.
Especially suspect are the export figures for this September and October. China’s exports for September soared 9.9% year-on-year. In the following month, they jumped 11.6%. For many observers, the September number signalled the beginning of the long-awaited recovery of the Chinese economy.
The September-October period is now beginning to look like an anomaly from the baseline, represented by the more-typical August and November figures. In fact, the numbers for August and November look remarkably similar. In August, exports increased 2.7%. In November, they were up 2.9%. Imports, always a key sign of growth, fell 2.6% in August. In November, they were unchanged.
Are we to believe China had an export boom lasting just two months? Anything is possible, but a more likely explanation for the anomalous September and October figures is that they were distorted by fictitious transactions.
Anne Stevenson-Yang of J Capital Research in Beijing, in one of her November e-mail alerts, suggests that the uptick in exports may have been partly due to hot-money inflows caused by currency speculation. Exporters, she notes, are overstating sales, allowing them to book revenues in dollars. They then use the paperwork to get permission to sell dollars for renminbi. The result is that exporters made money with their currency transactions, but the byproduct is that the Ministry of Commerce’s trade figures overstate China’s exports.
Tom Holland of the South China Morning Post reports an even more ingenious scheme that has artificially pushed up Beijing’s trade statistics. There is, he notes, legitimate trade where goods go from one part of China to another through Hong Kong. For example, it makes sense to transport through Hong Kong components manufactured in Shanghai for final assembly in Shenzhen. Since 1997, Hong Kong has been part of the People’s Republic, but it is not considered as such for customs purposes.
Most of this China-Hong Kong-China trade has been routed through Hong Kong “as a tax dodge.” The benefits are substantial. For instance, China’s rules provide for a value-added-tax rebate of 17% on electronic goods. Moreover, under the Closer Economic Partnership Arrangement between China and Hong Kong, no Chinese tariffs are imposed on goods exported to Mainland China if some value was added in Hong Kong. “All that’s needed then is a little imaginative invoicing, and you’ve got one very lucrative tax evasion scam,” Holland writes. “In all probability the goods never actually need to leave the mainland.”
Holland believes the value of renminbi transactions associated with this tax stratagem over the past 12 months “may have been well over 1 trillion yuan.” In any event, these fake trades appear to be larger in volume than legitimate speculative trades involving the renminbi, and a well-known European journalist has recently stated that the round-tripped tax dodge trades were “material.” Hong Kong officials, he noted, have passed on information on faked trades to Beijing, which “so far has sat on its hands.”
Why would Hong Kong’s officials not crack down on these transactions on their own? One reason is that they appear to be under orders to promote Hong Kong as the place to trade renminbi and these deals inflate statistics on renminbi usage there. Holland notes that all the fake trades are probably conducted in China’s currency to avoid the expense of forex dealings. Furthermore, Beijing gets a twofer: the fake transactions swell China’s import and export numbers and they artificially enlarge the statistics showing trade settlement in renminbi, something Chinese officials want to promote.
Tom Holland’s fascinating reporting would not explain the September-October bump in exports, but he does show that these tax-dodge transactions have generally bloated Beijing’s trade numbers.
And how long have these transactions padded China’s trade statistics? The fake transactions probably go back to 2010 because importers and exporters began to use the renminbi for trade settlement purposes in 2009.Source: Forbes “China’s Recent Trade Statistics Have Been Artificially Inflated”
- China trade surplus, exports growth disappoint (marketwatch.com)
- Hong Kong money brokers run out as demand for RMB soars (chasvoice.blogspot.com)
- In China, can investors trust that books aren’t cooked? (chinadailymail.com)