Widening gap between China, Hong Kong trade figures raises fake trade concerns

[HONG KONG] The gap between China's and Hong Kong's official trade figures widened sharply in December, raising concerns that market players might be using trade to move funds across borders at a time when Beijing is trying to curb capital outflows.

China's Customs data showed that the mainland's imports from Hong Kong surged 64 per cent year-on-year last month, while Hong Kong's statistics indicated that the city's exports to the mainland rose just 0.9 per cent from a year earlier.

According to Reuters data, this is the largest discrepancy between the two official figures in absolute terms since the beginning of the datasets in 2006.

Similarly, China's exports to Hong Kong increased 11 per cent, while Hong Kong's imports from China contracted 1 percent.

Statistical discrepancies have always existed between China's and Hong Kong's respective cross-border trade numbers, to a greater or less extent.

However, analysts say market players appeared to be using the wide spread between onshore and offshore yuan foreign exchange rates and disguising possible arbitrage activities across borders as trade transactions. "The divergence of trade data indicates a potential use of trade channel for financial arbitrage," said Raymond Yeung, a senior economist at ANZ in Hong Kong. "By blowing up trade figures, traders may have potentially received a larger forex quota to move funds abroad," said Mr Yeung.

China has been working hard to prevent funds from flowing out of the country as capital flight adds to the downward pressure on its currency, which has already lost 4 per cent against the dollar in the past three months.

In a series of measures taken recently, the world's second-largest economy has suspended new applications for the Renminbi Qualified Domestic Institutional Investor (RQDII) scheme, and instructed yuan participant banks to stop yuan account financing. "The gap was caused by cross-border arbitrage on different foreign exchange rates and interest rates in and out of China. People may do several rounds of fund transfers, inflating both imports and exports figures," said Liao Qun, China chief economist at Citic Bank International in Hong Kong.

The spread between onshore and offshore yuan widened to 1,400 pips this month, the highest level since September 2011.

Using trade channels to steer clear of Beijing's regulations on capital account controls isn't a new trick, especially when the spread between two yuan foreign exchange rates onshore and offshore widens.

In late 2013, a spike in yuan trade settlement coincided with a divergence in China and Hong Kong trade statistics, indicating possibly fake invoices and arbitrage fund flows disguised as trade.

REUTERS