Last night, China reported stronger than expected imports and exports.
Nomura calls it bunk, saying that the numbers are being distorted by an attempt by Chinese companies to circumvent capital controls.
In other words, traders are finding a way to get more money into China (which is regulated to avoid an influx of cash) by overpaying for goods shipped from China to Hong Kong.
Says Nomura’s Zhiwei Zhang:
China’s export growth rose to 14.7% y-o-y in April from 10.0% in March, which was much stronger than expected (Consensus: 9.2%; Nomura: 8.0%; Figure 1). By destination, export growth to all major economies remained negative, albeit somewhat improved: exports to the US eased to -0.7% y-o-y in April from -6.5%, while those to the EU eased to -6.4% from -14.0% and those to Japan eased to -1.2% from -10.0% (Figure 2). However, growth of exports to Hong Kong was strong at 57.2% y-o-y in April from 92.9% in March, and those to Asean grew by 37.2% from 11.6% in March. Data suggest that demand in emerging markets has been holding up well, despite the ongoing weak demand in the advanced economies. We believe exports to destinations like Hong Kong, a major financial hub, are likely being over-invoiced in an attempt to circumvent capital controls and bring foreign capital into China. This view is supported by the recent SAFE announcement of capital flow controls on 5 May, which identified trade as a potential channel for unregulated capital flows.
We believe the strong trade growth is not indicative of a growth recovery. Instead, it may have reflected continued capital inflows in April. On 5 May, the State Administration of Foreign Exchange (SAFE) announced a set of measures to crack down on the practice of misreporting in the trade sector, which reinforces our view that the trade growth has been artificially high in 2013 because firms over-reported the value of their exports. Also, exports and imports from the tax-free special custom zones soared in recent months, reaching 9.5% of total exports and 14.4% of total imports for the first 4 months in 2013, compared to 3.1% and 8.6% in the same period of 2012 (Figure 4). This further supports our contention that trade growth has been artificially high. We believe some of these trade flows may have been utilized for capital flows purposes. Excluding trade from these zones, we estimate that China‟s export growth was 6.6% y-o-y in April, while import growth was 9.3% (Figures 5 and 6). The distortion of working days also exaggerated export and import growth numbers. This year, April had two more working days than it did last year, which we estimate may have contributed 5 percentage points to trade growth.
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