|Workers stand atop shipping containers at the Kwai Tsing Container Terminal in Hong Kong. The gap between the official trade figures for the Chinese mainland and Hong Kong has triggered alarm that market players might be moving funds across borders. (David Paul Morris / Bloomberg)|
The months-long gap between the Chinese mainland’s reported imports from Hong Kong and the city’s exports to the mainland has continued to widen, triggering renewed fears over the specter of over-invoicing haunting the trade sector in the world’s second-largest economy.
Mainland imports from the SAR in the first quarter of this year soared a staggering 103 percent from a year ago even as total imports fell by 8.2 percent year-on-year, while inbound shipments from other major trading partners also declined, according to the General Administration of Customs.
Corresponding data released by Hong Kong’s Census and Statistics Department on Tuesday showed an 8.7-percent drop, indicating the value of imported goods from Hong Kong had been overstated, with capital outflows from the mainland disguised as import transactions.
Last month alone, according to mainland customs authorities, imports from the SAR soared 116 percent year-on-year after having risen 89 percent in January and February, while Hong Kong statistics showed that the city’s exports were down by up to 11 percent.
The practice of over-invoicing is seen essentially as a technique and a non-traditional means by speculators to evade capital controls and move money out of the country.
Amid growing concern that the central government is tightening its grip on capital exiting the country while the market still bets on the yuan’s depreciation, investors are relishing the idea of over-invoicing the mainland’s imports from Hong Kong to take more funds out of the country, UBS China economists said in a recent report.
“The Chinese mainland’s trade data appear to have been distorted by a strong desire to get assets out of renminbi and into foreign currencies. With rigid capital controls in place, those seeking greater access to foreign currencies have always had an incentive to over-invoice for imports,” said market research firm Fathom Consulting.
According to UBS, the mainland’s imports from Hong Kong jumped 71 percent year-on-year on average between December last year and February this year, in sharp contrast to Hong Kong data on its exports to the mainland which somehow posted declines of 7.9 percent and 6.4 percent in January and February, respectively.
“Yet, the absolute size of invoice inflation has been relatively limited, given that the Chinese mainland’s monthly average imports from Hong Kong amounted to only $1.5 billion from December last year to February,” UBS said.
The mainland’s total imports from the SAR remained comparatively small at $1.6 billion last month, compared with $13.3 billion from South Korea, $12.9 billion from the US and $12.4 billion from Japan.
Fielding Chen Shiyuan, Asia economist at Bloomberg Intelligence, said he expected the mainland’s capital flight through over-invoicing of imports from Hong Kong for the first three months of this year to stay at about $1.6 billion, compared with $175 billion in capital outflows during the same period as estimated by the Institute of International Finance (IIF).
The ongoing round of over-invoicing of imports, Chen told China Daily, is more of a trend dating back to mid-2014, making it different from the previous rounds that were, basically, short-lived.
The 2014 trend, which saw the degree of overstatement rising substantially toward the end of last year, is, by and large, in accord with the renminbi’s years-long volatility. The mainland currency’s high fluctuation since early 2014 rattled financial markets in August last year with a one-off depreciation of 3 percent against the dollar, and sparked jitters among investors in January with the price gap between the onshore and offshore yuan hitting a record of 1,400 basis points.
Here’s how the trick works. An exporting entity in Hong Kong issues a $5-million invoice, declares $5 million in exports to customs, and ship goods to an importing company on the mainland. The mainland firm reports to the Chinese customs with an inflated import bill of $10 million. This allows the passing of $5 million capital overseas, with the Hong Kong entity transferring the amount to its mainland trading partner’s offshore bank account.
Hong Kong stands as the very first destination for people and companies transferring cash out of the country.
Cross-border trade between the mainland and Hong Kong involves imports, exports and re-exports, the complex nature of which leaves much room for companies to blow up trade figures to a certain degree, explained a businessman surnamed Pang, who runs an import-export business involving plastic products and is based in Zhongshan, Guangdong province.
More importantly, the practice of over-invoicing usually requires a trading partner in the exporting country or region who can credit the amount of excess payment into its Chinese mainland counterpart’s bank account outside the mainland. There is no dearth of companies doing cross-border trade, and having an exporting entity in Hong Kong makes the financial hub something of an ideal playground for firms to play tricks with trade figures, said Pang.
“Actually, except for Hong Kong, I haven’t seen a constantly big divergence in trade data between the Chinese mainland and its major trading partners,” said Chen at Bloomberg Intelligence.
Precious metals, which are high in value and small in size, are, generally, the first choice for over-invoicing, providing for inflated import bills that are relatively difficult to figure out. High-tech products that are encouraged for export by the central government, but whose real value remains hard to estimate are also the preferred choice, Pang revealed.
Among the mainland’s imports from Hong Kong, the amount of jewelry and precious metals surged more than 200 percent on year during the period from December 2015 to February this year, according to UBS.
Chen believes that the practice of over-invoicing could be curbed to a certain extent, at least technically, if declarations by customs are carefully examined.
But a widening discrepancy between the two sets of trade data indicates the mainland authorities may think that other conduits, such as “underground banks” for taking cash abroad, need to be blocked more urgently.
Given that the mainland’s imports from the SAR make up less than 2 percent of its total imports, over-invoicing appears to be something they can live with, at least for the time being, Chen added.
A slew of policies have since been rolled out to limit capital exodus from the world’s second-largest economy.
Under strict capital controls imposed by mainland policy makers, individual citizens can only take out a maximum of $50,000 a year, meaning that anyone intending to spend more than that abroad must look for alternative ways to do so.
Earlier this year, the mainland’s currency regulator capped at $5,000 the amount for single transactions using UnionPay bank cards for the purchase of insurance products overseas, which have long been aggressively marketed as a popular method to circumvent the restrictions on individual foreign exchange limits and raise money offshore.
It came on the heels of last year’s suspension by regulators of large foreign exchange transactions of some banks until the end of this March.
With the renminbi showing signs of stabilizing with a 1.6-percent appreciation against the greenback last month, the capital outflow rush appears to be easing off.
According to the latest study published by the IIF on Monday, capital flight from the Chinese mainland would fall by one-fifth to $538 billion this year — from last year’s $674 billion.
The People’s Bank of China, apparently, still has a great deal of firepower, as the country’s foreign reserves rose for the first time in five months in March by a higher-than-expected $10.2 billion to $3.21 trillion, after posting its first annual drop since 1992 last year.
Chen believes that the apparent easing off in capital outflow from the mainland may help calm down the market and reduce over-invoicing practices slightly over the next few months.
However, the months-long divergence of cross-border trade figures could hardly be narrowed down in the short run, as the import volumes are small and a reduction in over-invoicing activity may not be sufficient to indicate a percentage change.
“After netting out the effect of a low base last March, this March’s imports from Hong Kong may still post a year-on-year increase of nearly 90 percent. For the months to come, the mainland’s imports from the city would remain at this level, at least statistically,” said Chen.email@example.com