Days after the Switzerland-based Bank for International Settlements played down fears over capital flight out of China, new trade data has put the spotlight on a channel used to ferret out billions worth of illicit money flows: phantom goods.
A steep rise in China’s reported imports from Hong Kong has raised concerns that trade invoices are being manipulated to get capital out of the nation amid fears that the yuan is likely to continue to weaken.
Data for last month, released on Tuesday, shows imports jumped 89 percent from a year earlier, as total exports fell 14 percent.
While the increase was not as great as in January, economists said the spike follows similarly unusual patterns in recent months, pointing to companies using trade channels to pay for goods far in excess of their value or even which do not exist at all.
“There has been a huge increase in payments,” said Andrew Collier, an independent China analyst in Hong Kong and former president of the Bank of China International USA.
“The well-connected Chinese in state and private firms are using any tool in the shed to inflate overseas payments,” he said.
China’s capital exodus accelerated through last year, as investors worried that policymakers would allow the yuan to weaken to cushion an ongoing slowdown in the US$10 trillion-plus economy.
The People’s Bank of China has insisted it is not contemplating a big change in currency policy and spent billions of the nation’s foreign exchange reserves defending the yuan’s value.
While China has strict rules on moving capital offshore, those seeking to evade limits can disguise money flows as payment for goods exported or imported to foreign countries or territories, especially Hong Kong.
Economists have said that they suspect China’s trade numbers for December last year and January were also skewed by this activity.
“Data distortions from hidden capital flows remain a problem,” Bloomberg Intelligence economists Tom Orlik and Fielding Chen wrote in a note.
The reported US$880 million in imports from Hong Kong in January were “implausible,” Orlik and Chen wrote.
Over-invoicing for goods gives a company or individual the opportunity to skirt China’s capital controls and shift money offshore.
As companies and savers shift money out of China, authorities have responded by clamping down on the myriad of illicit channels used, from curbing purchases of overseas insurance products to stopping friends and family members from pooling their US$50,000-a-year quotas to get large sums of money out.
However, China’s capital borders remain porous. In particular, little attention appears to have been paid to companies misreporting imports and exports, research by Deutsche Bank AG showed.
Economists at the German lender found that the practice has become a key way to skirt capital controls and accounted for US$328 billion of the record outflows between August last year and January, or 78 percent of the decline in China’s reserves.
“China has experienced massive capital outflows since August 2015,” Hong Kong-based Deutsche Bank economists Zhiwei Zhang (張智威) and Li Zeng wrote in their report on Monday last week.
An estimate by Bloomberg Intelligence put the total for last year at US$1 trillion.
Over-reporting imports is likely the most important illicit channel, the Deutsche Bank research showed, which cited official banking statistics that recorded China paying US$2.2 trillion for goods imported last year, while China Customs data only records US $1.7 trillion of imports.
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