China Fake Invoice Evidence Mounts as HK Figures Diverge

The gap between China’s reported exports to Hong Kong and the territory’s imports from the mainland widened in September to the most this year, suggesting fake export-invoicing is again skewing China’s trade data.

China recorded $1.56 of exports to Hong Kong last month for every $1 in imports Hong Kong registered, leading to a $13.5 billion difference, according to government data compiled by Bloomberg. Hong Kong’s imports from China climbed 5.5 percent from a year earlier to $24.1 billion, figures showed yesterday; China’s exports to Hong Kong surged 34 percent to $37.6 billion, according to mainland data on Oct. 13.

While China’s government has strict rules on importing capital, those seeking to exploit yuan appreciation can evade the limit by disguising money inflows as payment for goods exported to foreign countries or territories, especially Hong Kong. The latest trade mismatch coincided with renewed appreciation of China’s currency, leading analysts at banks and brokerages including Everbright Securities Co. and Australia & New Zealand Banking Group Ltd. to question the export surge.

“This is definitely another important piece of evidence of over-invoicing exports to Hong Kong to facilitate money inflow into China,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “So we shouldn’t be too optimistic about recent export data from China.”

Doubts over the data raise broader concerns, as a surge in exports was believed to have underpinned economic growth in the third quarter. Shen said the economic outlook is “challenging” and more easing is “necessary.”

Industrial Profits

Data today added to evidence of moderating economic growth. Industrial profits rose 0.4 percent in September from a year earlier, following a 0.6 percent decline in August -- the weakest two months since mid-2012.

Gross domestic product rose 7.3 percent in the July-September period from a year earlier, the slowest expansion since the first quarter of 2009. Export demand has been a bright spot in an economy weighted by a property slump and a decline in investment growth.

Although a rapid increase in luxury goods shipments suggests some of the exports to Hong Kong should be attributed to capital inflows, exports of processed goods including the iPhone drove the September surge, said Hua Changchun, a China economist at Nomura Holdings Inc. in Hong Kong.

“The fake invoicing problem is not as severe as last year,” Hua said.

Yuan Bets

After almost uninterrupted annual gains since 2005 that saw the yuan rise about 33 percent versus the dollar, speculators have come to see China’s currency as a one-way trade. That prompts hot money to seek out China on currency appreciation bets. Worries about distortions had abated this year after a government crack down and as the yuan dropped.

Companies have “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 last month. The country has uncovered almost $10 billion in fraudulent trades nationwide since April last year.

China’s government noticed the rapid increase in trade of some merchandise with Hong Kong in September, Shen Danyang, spokesman of the Ministry of Commerce, said at a briefing on Oct. 16. The spokesman said the ministry will step up scrutiny and analysis.

The State Administration of Foreign Exchange of China didn’t immediately respond to a fax sent yesterday asking about the reliability of the data.

The China-Hong Kong export gap highlights a “policy risk” if authorities respond with disciplinary action and foreign exchange intervention, analysts at ANZ Bank led by Raymond Yeung wrote in a note yesterday.

“We believe that the People’s Bank of China is paying close attention to possible resurrection of cross border financial arbitrage and non-genuine trade activities,” the analysts wrote. “We should pay close attention to the possible consequences.”

— With assistance by Xiaoqing Pi

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