In note to clients sent Thursday morning, Credit Suisse analysts Dong Tao and Weishen Deng suggest that Chinese corporates are going to extraordinary lengths to get around government restrictions on selling yuan.
The analysts noted that exports to and imports from Hong Kong have surged recently, and there is a widening gap between China’s export data and Hong Kong’s import data. Exports of electronic integrated circuits (EIC) have “jumped remarkably,” according to the note.
Here is the key bit of the note (emphasis ours):
“All of these features match those in the late 2012-early 2013 period when there were allegations that some of the trade data were affected by falsified trade activity. Based on this circumstantial evidence, we are inclined to believe that a large portion of the recent external trade improvement came from trade fabrication instead of strengthened demand.”
China’s exports contracted by 1.4% year-over-year in December, way ahead of the 8% decline the market expected. According to Credit Suisse, this trade data overstates trade growth in China. Their contacts in export manufacturing said any improvement was marginal.
Credit Suisse says a lot of that beat came from exports to Hong Kong. Exports to Hong Kong were up 10.8% year-over-year, and imports from Hong Kong surged a whopping 64% year over year. The Swiss bank says that doesn’t match Hong Kong’s trade data.
Additionally, exports to all of China’s special trade zones increased, with electronic integrated circuit exports also surging. The growth in EIC exports is especially telling, according to the analysts, as the components are light in weight, easy to store and transport, and have a value that is hard to determine.
“Jewellery and electronic integrated circuits (EIC) were the popular candidates during the previous bout of trade data falsification,” the note said.
So that leaves us with the question — why would Chinese companies want to do something like this?
The answer goes back to the same thing that’s been driving global markets from the beginning of 2016, the Chinese yuan or renminbi (RMB).
“It is about converting RMB assets to USD assets in a tightened environment for converting to foreign currencies on the expectation the RMB will depreciate,” the Credit Suisse analysts said.
China’s economy is transitioning from an investment-based economy to one based on consumption. As new drivers of growth are rising, the old drivers are falling faster than the government expected. This has become a huge strain on the country’s economy, and the government has done a lot over the last year or so to keep money flowing around — like 6 interest rate cuts.
Around December, as part of this strategy to keep the economy moving along, the Chinese government started letting the yuan depreciate very carefully. That action has continued into 2016, and now it’s driving markets.
And, according to Credit Suisse, it’s also driving the Chinese to manipulate their trade data (from the note):
In its simplest form, importing from overseas offers corporates a valid reason to exchange RMB for USD in order to pay for the imports. Subsequently, the USD sent offshore can be used for debt repayments, to unwind previous carry trades, or to buy USD assets.
Here is a longer explanation:
It strikes us that Chinese entities and individuals are seeking opportunities to convert RMB assets to USD assets, amid heightened expectations of RMB depreciation. As official converting channels become more difficult (reportedly, some banks only allow USD2,000 to be exchanged per visit, and by appointment only, despite customers having an annual quota of USD50,000), some entities and individuals are becoming innovative. That adds pressure on the central bank and the exchange rate.
To be fair, Japanese bank Nomura noticed the same strange surge in Hong Kong data activity. It says “the improvement as at least partly due to arbitrage activity.”
Who knows, really?