Hot money distorts China's exports as speculators seek to cash in on yuan, rate reforms

Wed Dec 11, 2013 6:02am EST
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By Pete Sweeney

SHANGHAI (Reuters) - China is seeing a resurgence of "hot money" seeking to cash in on the rallying yuan and record-high interest rates, contributing to distortions in its trade data as speculators move money through regulatory loopholes.

The return of distorted trade figures is unlikely to be welcomed by the People's Bank of China (PBOC), although it is facing a dilemma. It wants to keep the yuan from appreciating too quickly but at the same time has pledged to gradually free up its grip on the currency to encourage its global use.

November exports rose 12.7 percent on-year, blowing past a Reuters poll that predicted 7.1 percent growth, but many analysts suspect the performance was inflated by speculators moving money into the country through fake trade transactions.

Nomura economist Zhang Zhiwei pointed out in an email to clients that China's export growth far exceeded that of its Asian neighbors in November, which is unusual.

At the same time, imports grew less than expected and factory output slightly underperformed expectations; all three together form a combination analysts find highly suspicious.

"The Hong Kong number is suspicious," said Wei Yao, economist with Societe Generale in Hong Kong. "The month-on-month increase is 28 percent, the strongest since April."

Hong Kong's economic integration and close proximity with China has made it a favored target for fake trade in the past; companies can cheaply ship lightweight products to Hong Kong, sell them at elevated prices, then use the resulting foreign currency into yuan in China, thus evading controls on investment flows by dressing them up as trade receipts.

Beijing found the November data suspicious, too, and regulators announced over the weekend they will crack down on banks' and companies' use of foreign currency for trade finance by ensuring that trade deals are authentic and by monitoring for unusual cross-border cash flows.   Continued...

A man wears a mask while walking on a bridge during a hazy night in Shanghai's financial district of Pudong December 5, 2013. REUTERS/Aly Song