China uncovered almost $10 billion in fraudulent trade nationwide as part of an investigation begun in April last year, including many irregularities in the port of Qingdao, the country’s currency regulator said today.
Companies “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. The trades have “increased pressure from hot money inflows and provided an illegal channel for criminals to move funds,” Wu said, adding that those involved in such fraud would be severely punished.
“Some companies used the trade channel to bring in hot money,” said Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group Ltd. SAFE’s investigation “will likely further cool down hot money inflows and commodity imports could slow as banks will likely conduct more careful checks on documentation.”
Industrial metals fell and the yuan weakened after the announcement. Copper slid as much as 0.5 percent and all main metals on the London Metal Exchange declined. Chinese banks have about 20 billion yuan ($3.3 billion) of exposure to companies caught up in a loan fraud probe in Qingdao, two government officials told Bloomberg in July.
SAFE identified the fake trade invoicing as part of a crackdown on the practice in 24 cities and provinces, Wu said. The news raised speculation that metals supplies may increase as stockpiles tied up in financing deals come back on the market.
The People’s Bank of China has built up the world’s largest foreign-exchange reserves as it bought dollars to limit the yuan’s gains with the nation’s higher interest rates drawing inflows. China’s benchmark 10-year sovereign yield declined 51 basis points, or 0.51 percentage point, this year to 4.04 percent on Sept. 24. This compares with 2.56 percent for similar-maturity Treasuries.
After almost uninterrupted annual gains since 2005 that saw the yuan rise 33 percent versus the dollar, speculators had come to see China’s currency as a one-way trade, leaving the world’s second-largest economy vulnerable to a sudden shift in investor sentiment. The PBOC guided the currency 2.4 percent lower in the first half of this year to deter such bets. Yuan positions at Chinese financial institutions, which typically rise as the monetary authority sells yuan to limit gains, fell last month by 31.1 billion yuan.
The currency rose to 6.1283 per dollar on Sept. 10, the strongest level since March, days after the nation posted a record $49.84 billion trade excess for August. The yuan fell 0.13 percent to 6.1458 in offshore trading in Hong Kong today, while 12-month non-deliverable forwards dropped 0.2 percent to 6.2415. The spot rate in Shanghai lost 0.05 percent to 6.1375.
Inventories of copper in warehouses linked to exchanges such as the LME and Comex will rise over the next six months in part because of fewer financing deals in China, Goldman Sachs Group Inc. said in a Sept. 23 report. Banks, trading companies and warehouse operators have been checking their exposure to metals stored at Qingdao and lenders have reigned in commodity financing this year.
Copper for delivery in three months fell as much as $31 to $6,711 a ton on the London Metal Exchange. Aluminum was down 0.4 percent at $1,966 a ton.
“Qingdao is not over,” said Chae Un Soo, a metals trader at Korea Exchange Bank Futures Co. The news will “definitely” impact demand for metals tied up in financing deals, he said.
— With assistance by Xin Zhou, Kyoungwha Kim, and Alex Davis