China Says Trade Figures Inflated by Arbitrage With Hong Kong

China said data on trade with Hong Kong were inflated by arbitrage transactions that skirted rules, the government’s most explicit acknowledgment that export and import figures this year were overstated.

The transactions “resulted in abnormal growth in mainland-Hong Kong trade for a few months” since the fourth quarter, Shen Danyang, a Commerce Ministry spokesman, said at a monthly briefing in Beijing yesterday. “Even if these arbitrage trades are not necessarily illegal, they are not fully compliant with regulations. That’s why the government has been concerned about this.”

Trade growth slowed “sharply” in May due to curbs on China-Hong Kong transactions that were exchanges of money rather than true trade, Shen said, building on a June 8 customs administration statement that attributed the slowdown in part to a crackdown on arbitrage deals. Weakness in trade may test Premier Li Keqiang’s reluctance to add stimulus to support expansion in the world’s second-biggest economy.

The May data reflected “the current grim and complicated foreign trade situation,” Shen said.

Shen didn’t elaborate on the arbitrage transactions or how much they inflated trade figures. Lu Ting, head of Greater China economics at Bank of America Corp. in Hong Kong, said in a report last month that 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.

Ideal Channels

Lu speculated 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 the report.

May exports rose 1 percent from a year earlier, down from 14.7 percent in April, while imports dropped 0.3 percent from a year earlier. The median estimates of analysts were for 7.4 percent export growth and 6.6 percent import gains.

“The economic fundamentals for arbitrage trade are shifting as expectations for the yuan to depreciate start to emerge,” said Ken Peng, a BNP Paribas SA economist in Beijing. “Even without trade curbs, the motivations for bringing hot money into China are limited.”

Economists in a survey last month said January-April export growth was overstated by 4 to 13 percentage points. Shipments abroad probably rose 8.5 percent in the first four months of 2013 from a year earlier, based on the median estimate of 15 economists, less than half the official 17.4 percent number. Imports may have gained 8.25 percent, according to 14 analysts’ median estimate, compared with the government’s 10.6 percent figure.

— With assistance by Xin Zhou

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