Capital has been flowing out of China at unprecedented rate over the past six months. Amidst concerns about the economy and the potential for further weakness in the Chinese renminbi, many investors are running for the exits.
With regulators closely monitoring cross boarder flows, heightening the risk of more stringent capital controls being put in place, investors have become increasingly inventive when it comes to getting money out of China.
Take the practice of fake invoicing, for example.
Based on recent anomalies between Chinese and Hong Kong trade figures, it appears many investors are now trying to get their capital out through non-traditional means, overstating the value of imported goods from Hong Kong to circumvent Chinese capital controls.
It’s the exact opposite scenario to what was seen in past years where firms in Hong Kong were overstating the value of imported goods from China in order to get capital in there, avoiding capital controls in an attempt to speculate on further strengthening in the renminbi.
Here is the UBS China economics team, Ning Zhang, Jennifer Zhong and Tao Wang, on why they suspect fake invoicing is back (with our emphasis in bold).
Some capital outflows may have been disguised under over-invoicing of imports from Hong Kong. In the previous three months (December to February), China imports from Hong Kong jumped by 71% y/y on average, in sharp contrast with Hong Kong’s statistics of its exports to China. The difference between China and counterparty data widened visibly as a result. Among China’s imports from Hong Kong, jewellery and precious metals surged by over 200% y/y in the previous months. In light of RMB depreciation expectation and rising pressure of capital outflows in late 2015, we think it is possible that speculators have used overinvoicing of China’s import from Hong Kong again as a channel to move money out of China, though the absolute size has been relatively limited (i.e. China’s monthly average imports from Hong Kong was USD1.5 billion from December to February).
The chart below, supplied by UBS, shows the discrepancy between Chinese imports from Hong Kong, reported by Chinese customs, compared to Hong Kong exports to China, released by the Hong Kong government.
Hong Kong trade data for March will be released on March 29. It will be interesting to see whether the anomaly between the two nation’s figures has continued.