The discrepancy suggests China’s trade recovery in December was inflated by fake invoicing to skirt capital controls and profit from the difference between the yuan’s exchange rates in on-shore and off-shore currency markets.
In a twist to fake invoicing in 2013, when the government said export and import figures were overstated due to the phony trade to bring money into the mainland, the refreshed practice has more to do with capital outflows from China. Outflows jumped in December, with the estimated 2015 total reaching $1 trillion, Bloomberg Intelligence estimates show.
"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. By blowing up trade figures, traders may potentially receive a larger forex quota to move their funds abroad."
The above news of record capital outflows acted a drag on the stock market today with the A-Share Index dropping below the psychological 3000 level to extend the downtrend.
The move was led by the banking sector which has been falling steadily over the last month and extended the decline today. Since the government can most easily manipulate the performance of this sector the decline suggests they are willing to wait a while before stepping in to lend additional support.
$1 trillion is a big number and we don’t really know how accurate it is but it is clear domestic capital is fleeing China while at least some foreign capital is being repatriated. This chart of the PBOC’s balance sheet fell the equivalent of $700 billion last year and is now trending lower following more than a decade of expansion. That is an indication of just how much money the Chinese are spending on supporting the Yuan and suggests it is only a matter of time before the currency is depreciated further.
The Hong Kong listed H-Share Index has paused in the region of 8000 but a clear upward dynamic will be required to signal a return to demand dominance in this area.
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