China's Fake Export Numbers Under Close Scrutiny

China's export numbers are so unbelievable that even mainstream media doesn't believe them. Bloomberg has the story correct, but its title could use a bit more punch.

Please consider China Trade Puzzle Revived as Hong Kong Data Diverge

China’s trade numbers, distorted by fake exports last year, are set to come under renewed scrutiny after a discrepancy between Hong Kong and Chinese figures for bilateral trade widened to the largest in eight months.

Hong Kong’s December imports from China fell 1.9 percent from a year earlier to HK$176 billion ($22.7 billion), the city’s statistics department said yesterday. That compares with $38.5 billion in exports to Hong Kong reported earlier this month by China’s customs administration, up 2.3 percent, based on data compiled by Bloomberg.

Economists split on how to interpret the latest numbers, which follow reports earlier last year that invoices for fake exports were used to disguise capital inflows, inflating China’s trade data before regulators in May cracked down on the practice. Exaggerated overseas shipments would mean that global demand is weaker than China’s statistics indicate.

“From the last few months’ data, we have seen hints that some Chinese exports are fake and in fact that reflects hot money inflows,” said Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong.

China’s exports to Hong Kong in December exceeded the city’s reported imports from the mainland by about 70 percent, the biggest difference since April.

Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, said the gap between China’s reported increase in exports to Hong Kong and the city’s reported decline in imports isn’t big enough to raise any red flags when compared to the difference earlier in 2013.

That’s because China records exports when goods leave, while Hong Kong waits 14 days after items arrive in port to record them as imports, Shen said.

Round Tripping

Another possible explanation for the discrepancy is “round tripping” of goods that are exported from China to Hong Kong and then back to the mainland, Australia & New Zealand Banking Group Ltd. said in a report yesterday.

“The round-tripping trade has become an avenue to fuel China’s capital inflows,” as the current account may have been “improperly used as an alternative way of liquidity injection,” economists Liu Li-Gang and Raymond Yeung wrote. The gap in interest rates fuels the practice and policy makers in China and Hong Kong “need to closely watch the potential risks such activities present to the financial system.”

Place your bets. But I suggest no data from China is likely to be very reliable, especially export and GDP numbers.

Moreover, if export numbers are inflated, then GDP numbers are inflated by definition.

Of course, GDP is already overinflated for two other reasons:

1. GDP is not adjusted for various shadow banking schemes and other malinvestments that will eventually be written off.
2. GDP is not adjusted for massive amounts of air and water pollution that will at some point have to be cleaned up. 

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com