China Trade Surplus Seen by BofA at One-Tenth Customs Figure

China’s trade surplus is one-tenth the official $61 billion reported so far this year after accounting for fake transactions used to disguise hot-money inflows, Bank of America Corp. says.

The true surplus is about $6 billion, according to Lu Ting, Bank of America’s head of Greater China economics in Hong Kong. That would be the smallest for January-April since the nation posted a $10.8 billion deficit in 2004.

Lu’s calculations suggest the surplus shrank instead of tripling from a year earlier, a sign that global demand is restraining rather than boosting the world’s second-largest economy. Bank of America’s estimate underscores the size of possible discrepancies in the trade data, which has been disputed by analysts for four months, and broader skepticism about Chinese statistics from gross domestic product to jobs.

“Growth is weak in China now -- the overstated export growth means the real growth is slightly weaker,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “We are expecting to see a fairly big drop in export growth in the coming months” as regulators crack down on so-called hot-money inflows, he said.

The government reported a trade surplus of $18.8 billion for the first four months of 2012.

Money Flows

According to Lu, ruses may have included exports and imports that enabled money flows for people engaged in arbitrage between the onshore and offshore exchange rates for the yuan. He speculates that shipments of gold in and out of Hong Kong have been for this purpose, since valuable goods with low transportation costs are “ideal channels” for hot money flows, according to a May 10 report.

Liu Zhengwen, 36, is a business manager in Shenzhen who handles exporters’ customs and foreign-exchange settlement. This year’s export situation “feels like 2008,” he said, referring to when shipments began plunging because of the global financial crisis. “There’s no money to make from normal operations -- that’s why gray-area or illegal practices emerge.”

“A friend in my industry just visited me and talked about forging documents to make money,” said Liu, who has worked in the business for six years. “I don’t want to take the risk.”

Louis Kuijs, Royal Bank of Scotland Group Plc’s chief China economist in Hong Kong, estimates that $37 billion of the trade surplus in the first quarter resulted from export-data “irregularities.” He didn’t give an estimate for the surplus itself. The General Administration of Customs, which is responsible for China’s trade data, showed a surplus of $43 billion for the period.

Agency Comment

The customs administration didn’t respond to faxed questions seeking comment on the trade-balance estimates.

Lu was the only one out of eight analysts contacted by Bloomberg News to give an estimate of the trade balance in the first four months of the year.

Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong, said the official trade surplus is overstated though the true figure isn’t as small as 10 percent or 20 percent of the headline number. Steve Wang, Hong Kong-based chief China economist at Reorient Financial Markets Ltd., said the actual surplus probably wasn’t as low as Lu’s estimate because both exports and imports are inflated.

The estimates of a lower trade surplus dovetail with economists’ assertions that export growth this year, and to a lesser extent import gains, have been overstated in part because companies are issuing false invoices to bring in funds chasing higher returns in China.

Growth Assumptions

Lu said his estimate was based on assuming true export growth of 5 percent, compared with the government’s 17.4 percent figure, and 7.6 percent import gains, below the official 10.6 percent number.

The customs administration’s export figures contrast with data from the National Bureau of Statistics on gross domestic product, factory production and retail sales showing a slowdown. Investors soured on China’s outlook in a Bloomberg global poll this month, with the share of respondents who see the economy deteriorating doubling from January.

UBS AG cut its economic-growth forecast to 7.7 percent from 8 percent for this year, according to a report yesterday by economists led by Wang Tao in Hong Kong. “Strong credit expansion has so far not generated the expected increase in investment activities,” UBS said.

Zheng Yuesheng, a customs administration spokesman, said in April that China is investigating possible fraud behind first-quarter export growth and said the practice of false trade declarations “does exist but is definitely not mainstream.”

Asian Partners

Skepticism about China’s trade figures has centered on Asian partners including Hong Kong, Taiwan and South Korea, rather than the U.S. and Europe. China’s surplus with the U.S. was $55.7 billion in the first four months of 2013, compared with a $139.6 billion surplus with Hong Kong.

While export gains may slow on government efforts to limit hot-money flows, yuan gains also stand to put pressure on shipments. China’s currency rose to a 19-year high against the dollar today and is up about 20 percent against the yen this year as its competitor Japan undertakes unprecedented monetary easing.

“There is a limit to how much further appreciation China can undergo before the economy really starts to be hurt by it,” Kuijs said.

Before it's here, it's on the Bloomberg Terminal.