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China Trade Puzzle Revived as Hong Kong Data Diverge

Kwai Tsing Container Port Terminal
Shipping containers sit stacked on a pier at Kwai Tsing Container Port terminal 7 in Hong Kong. Photographer: Jerome Favre/Bloomberg

China’s trade numbers, distorted by fake exports last year, are set to come under renewed scrutiny after a discrepancy between Hong Kong and Chinese figures for bilateral trade widened to the largest in eight months.

Hong Kong’s December imports from China fell 1.9 percent from a year earlier to HK$176 billion ($22.7 billion), the city’s statistics department said yesterday. That compares with $38.5 billion in exports to Hong Kong reported earlier this month by China’s customs administration, up 2.3 percent, based on data compiled by Bloomberg.

Economists split on how to interpret the latest numbers, which follow reports earlier last year that invoices for fake exports were used to disguise capital inflows, inflating China’s trade data before regulators in May cracked down on the practice. Exaggerated overseas shipments would mean that global demand is weaker than China’s statistics indicate.

“From the last few months’ data, we have seen hints that some Chinese exports are fake and in fact that reflects hot money inflows,” said Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong. The discrepancy will abate as yuan appreciation slows in January and February, said Zhang, who previously worked at the International Monetary Fund.

China’s exports to Hong Kong in December exceeded the city’s reported imports from the mainland by about 70 percent, the biggest difference since April. The State Administration of Foreign Exchange said last month that it would boost scrutiny of trade financing and that banks should prevent companies from getting financing based on fabricated trade.

Industrial Profits

Industrial companies’ profits in China rose in December by 6 percent from a year earlier, the slowest pace since March, data from the National Bureau of Statistics showed today. That adds to signs of weakening growth, including a manufacturing index that fell more than estimated in January. The economy is likely to expand this year at the slowest pace since 1990, based on the median estimate in a Bloomberg News survey.

The benchmark Shanghai Composite Index of stocks was little changed as of 10:49 a.m. local time.

Hong Kong reported yesterday that its total imports rose 1.8 percent in December from a year earlier, trailing the median estimate of 3 percent among analysts surveyed by Bloomberg News. Exports were unchanged, compared with the median projection for a 3.6 percent gain.

China said Jan. 10 that its exports rose 4.3 percent in December from a year earlier while imports advanced 8.3 percent, helping it claim the title of the world’s biggest trading nation in 2013, passing the U.S.

Import Delay

Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, said the gap between China’s reported increase in exports to Hong Kong and the city’s reported decline in imports isn’t big enough to raise any red flags when compared to the difference earlier in 2013.

That’s because China records exports when goods leave, while Hong Kong waits 14 days after items arrive in port to record them as imports, Shen said.

“The data are highly consistent now,” said Shen, who previously worked at the IMF and the European Central Bank. The issue of fake exports has “almost disappeared,” he said.

Another possible explanation for the discrepancy is “round tripping” of goods that are exported from China to Hong Kong and then back to the mainland, Australia & New Zealand Banking Group Ltd. said in a report yesterday.

Fuel Inflows

“The round-tripping trade has become an avenue to fuel China’s capital inflows,” as the current account may have been “improperly used as an alternative way of liquidity injection,” economists Liu Li-Gang and Raymond Yeung wrote. The gap in interest rates fuels the practice and policy makers in China and Hong Kong “need to closely watch the potential risks such activities present to the financial system.”

The yuan rose about 0.7 percent against the dollar in December, the biggest monthly gain since April. The country’s foreign-exchange reserves, the world’s largest stockpile, grew $157 billion in the fourth quarter to $3.82 trillion, the People’s Bank of China said earlier this month.

“We can definitely not rule out there is very creative accounting and data reporting going on to again dress up additional inflows as exports because the incentives are there again” with the exchange rate and Chinese borrowing costs, said Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc in Hong Kong.

At the same time, other sources indicate that the “improvement is real” in global demand for Chinese exports, said Kuijs, a former World Bank economist who previously estimated that fake invoices inflated China’s 2013 export gains by about 2 percentage points.

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