By Mark Magnier and Wei Gu
BEIJING--China's better-than-expected trade figures in December
have sparked questions over whether trade flows have been inflated
by investors evading capital controls and the extent of incentives
being offered by government agencies to prop up exports.
China reported Wednesday that exports in December declined 1.4%
year on year. This was much better than the 8% drop expected by
economists in a survey by The Wall Street Journal and compared with
a 6.8% decline in November, allowing Beijing to end the trading
year on a stronger note. Imports fell by 7.6% last month, better
than the expected 11% decline, compared with an 8.7% drop in
November.
The December trade figures also were helped by favorable
comparisons with year-earlier figures, economists said.
Of particular note was a 64.5% jump in China's imports from Hong
Kong, the strongest pace in three years, analysts said. This
compared with a 6.2% decline for the January-November period.
"It really looks like capital flight," said Oliver Barron, China
research director with investment bank North Square Blue Oak. "This
has artificially inflated the total import data."
Officials at China's commerce ministry and foreign exchange
regulator didn't immediately respond to questions.
China in recent months has struggled to adjust to massive
capital outflows as Chinese investors seek better returns overseas.
China saw its foreign exchange hoard drop 13.3% in 2015, or by $500
billion, to $3.3 trillion by the end of December.
Under Beijing's strict capital controls, consumers are only
allowed to purchase $50,000 worth of U.S. dollars each calendar
year. But manipulated foreign trade deals offer a way around
tightening restrictions, say economists.
In an effort to stem the outflow, Beijing's foreign exchange
regulator announced stricter supervision starting January 1 to
screen suspicious individual accounts and crack down on organized
capital flight, according to an online statement.
Bank customers also have reported more difficulty recently
exchanging yuan into dollars, with some forced to wait four days to
complete a transaction that normally takes one.
And China has cracked down on illegal foreign-exchange networks,
including a bust announced in November in Jinhua, a city of five
million people in eastern Zhejiang province, allegedly involving
eight gangs operating from over two dozen "criminal dens" that
reportedly handled up to $64 billion in unauthorized transactions,
according to state media and a detailed police report.
The official People's Daily newspaper said 69 people had been
criminally charged and another 203 people had been given
administrative sanctions.
"Regulators have been trying really hard to close the
loopholes," said Steve Wang, economist with investment firm
Reorient Financial Markets Ltd., adding that the market seems
skeptical of Wednesday's trade figures. The Shanghai Composite
Index fell 2.4%. "I don't think Hong Kong has been buying or
selling any more from China. The December data is a huge question
mark," he added.
An example of how a Chinese company might move capital abroad
using trade deals would be to import 1 million widgets at $2 apiece
from a Hong Kong partner or subsidiary company, paying the $2
million, analysts said. It then exports the same widgets at $1
apiece, receiving $1 million from the Hong Kong entity. The goods
are back where they started, but $1 million has now moved
offshore.
Leading up to early 2014, China saw a wave of questionable
overinvoicing trade deals in the opposite direction as investors
moved money into China to take advantage of high interest rates.
Now the flow has apparently reversed, economists said.
Export shipments to Hong Kong in December also were notably
higher, economists said, rising 10.8% year-over-year compared with
a cumulative 8.7% year-over-year decline for January-November 2015.
This may reflect investor efforts to arbitrage the gap between
onshore and offshore yuan rates, said Citibank in a report. This
gap has been as much as 2% recently.
"An unusually large jump in exports to Hong Kong raised the
usual suspicions about capital flight, tempering optimism that
export demand was firming," said ING economist Tim Condon.
Also having a potential impact on China's improved December
export figures are incentives offered by various Chinese government
agencies. Customs spokesman Huang Songping told reporters Wednesday
that December's stronger export results partly resulted from
companies rushing to meet year-end targets.
James Mao, who runs a Shanghai-based company that exports
biochemical materials to the U.S., said the Shanghai government
promised at a December meeting to pay him and other exporters
between 500,000 yuan [$76,054] and 1 million yuan if they raised
their year-over-year fourth quarter exports by $1 million.
"It is difficult to earn a million yuan from actual business
nowadays," said Mr. Mao. "If the government is willing to give me
the money, why not take it?"
As China's economy has slowed and its once powerful export
machine has sputtered, Beijing has pared export taxes, reduced red
tape and boosted incentives to help traders, although few of the
programs appear to be as generous as the one mentioned by Mr.
Mao.
Pu Jiang county in eastern Zhejiang province announced on its
website in October a sliding scale bonus of up to 300,000 yuan for
companies that export up to $50 million dollars annually. And the
National High-Tech Zone of Ningbo, a major port near Shanghai, said
in August on its website that the top five companies that increased
exports by at least 10% could collect bonuses of up to 500,000
yuan.
Officials with the Shanghai, Pu Jiang and Ningbo governments
didn't immediately respond to a request for comment. An official
with a Shanghai government commercial hotline who declined to give
her name said companies that exported $1 million in the fourth
quarter and $5 million for the year would receive an undisclosed
bonus. Many government agencies don't publish bonus details in case
they run afoul of World Trade Organization rules governing
subsidies, she added.
Lu Li, who runs a company in Ningbo that arranges international
goods shipments said intermediaries that usually charge him to
process Customs documents for export shipments in late 2015 started
instead offering him several thousand yuan for receipt involving
large transactions. They may be using these as proof they hit the
export target, he added.
Mr. Mao, the biochemical exporter, said he exported enough to
qualify for the bonus. "As a private sector entrepreneur, I never
thought I could get a bonus from the government," he said. "The
central government has gotten more nervous about its poor export
numbers."
Olivia Geng contributed to this article.
Write to Mark Magnier at mark.magnier@wsj.com and Wei Gu at
wei.gu@wsj.com
(END) Dow Jones Newswires
January 13, 2016 08:59 ET (13:59 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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