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IN
last year's trade figures, China reported
that imports from Hong Kong increased 64.5
per cent year on year, write Mark Magnier
and Chester Yung in a Wall Street Journal
Real Times report. At the same time, Hong
Kong reported that exports to China increased
0.9 per cent.
Why
such a big gap in figures that should match?
Many suspected capital outflows across the
restricted border, a vast boondoggle to
evade currency controls.
Here
how it works: A mainland company might import
100,000 widgets at US$5 apiece from a Hong
Kong partner or subsidiary company, paying
them $500,000.
It
then exports the same widgets back to Hong
Kong at $1 apiece, receiving $100,000 from
the Hong Kong entity. The goods are back
where they started, but $400,000 has now
moved offshore.
ANZ
Group economist Raymond Yeung said the very
large spread between offshore and onshore
yuan rates recently has encouraged the potential
use of trade channels for financial arbitrage.
Economists
said the best way for China to stem the
flow is to calm markets, take control and
reduce expectations that the yuan is going
to decline sharply in value. "They
need to quite clearly intervene and not
allow the market to set the exchange rate,"
said Mizuho Securities Asia economist Jianguang
Shen.
Mr
Shen, who previously worked at the European
Central Bank, said: "Clear communication
is needed. They haven't been very transparent
lately."
According
to China's General Administration of Customs,
China imported CNY1.05 trillion (US$164.1
billion) worth of goods from Hong Kong in
December, a 64.5 per cent increase. On the
other side of the border, Hong Kong's Census
and Statistics Department reports that Hong
Kong exported HK$168.13 billion ($21.57
billion) to China in December, up less than
one per cent.
"It's
Mr and Mrs Chen sending money out,"
said Bank of Tokyo-Mitsubishi UFJ's Mr Tan.
"You need to calm their fears. And
in order to do that, you need to stabilise
the economy."
But
despite stepping up efforts by China to
prevent capital from leaving its shores,
a flood of funds continues to head overseas
in search of better returns, with trade
flows the latest front in efforts by investors
to circumvent restrictions.
"This
is very consistent with the idea that people
are using trade accounts to get money out
of China," said Cliff Tan, head of
global markets research with Bank of Tokyo-Mitsubishi
UFJ. "This is a very time-honoured
system in developing countries, you over-invoice
imports and under-invoice exports to get
money out of the country."
China
isn't sitting by idly. In recent months,
it's stepped up prosecutions against illegal
money changers, encouraged more companies
to invest in China, enhanced supervision
over cross-border transactions and blocked
foreign banks from trading onshore and offshore
currency, among other steps.
But
the capital keeps flying away, or is spent
by Beijing to intervene and keep the yuan
stable. China's foreign reserves have fallen
by US$663 billion since June of 2014, including
a record $108 billion in December.
That's
in spite of trade surpluses during the period
averaging nearly $50 billion, which act
to boost reserves. China has seen its foreign-exchange
hoard decline to $3.3 trillion at the end
of 2015 from a peak of $3.99 trillion in
mid-2014.
"Even
if China maintains tight controls, there
are always loopholes," said Mizuho
Securities' Mr Shen. "That's what the
Chinese government is worried about."
Under
strict capital controls imposed by Beijing,
consumers are only permitted to purchase
$50,000 worth of US dollars each calendar
year. But manipulated foreign trade deals
offer a way around tightening restrictions,
say economists.
Taken
from another perspective, says the Hong
Kong Economic Journal, the discrepancy suggests
China's trade recovery was inflated by fake
invoicing.
In
contrast to the fake invoicing in 2013,
when the government said export and import
figures were overstated as a means to bring
money into the mainland, the practice now
has more to do with capital outflows from
the mainland.
"The
divergence of trade data indicates a potential
use of the trade channel for financial arbitrages,"
said Raymond Yeung, a Hong Kong-based senior
economist at Australia & New Zealand
Banking Group Ltd.
Given
how the spread between the onshore and offshore
yuan widened in December, exporters and
importers "may move funds across the
border through trading with offshore affiliates,"
Mr Yeung said.
"By
blowing up trade figures, traders may potentially
receive a larger forex quota to move their
funds abroad."
After
China's trade data were released, economists
including Iris Pang at Natixis SA and Larry
Hu at Macquarie Securities Ltd, raised the
possibility it reflected fake invoicing.
While
China's government has strict rules on importing
capital, those seeking to exploit moves
in the renminbi can evade limits by disguising
money inflows as payment for goods exported
to foreign countries or territories, especially
Hong Kong.
Rather
like a speaker in a sound system that can
be also used as a microphone, so can cross
border sales be used to disguise financial
inputs and outputs as something other than
they pretend to be. But when global figures
disconnect massively as they have done twice
in recent years, customs officers raise
a hew and cry: "Who let the dogs out?
Who and why?"
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