• Fri
  • Dec 26, 2014
  • Updated: 10:03am

Hot money may have artificially boosted China's January exports

Unexpectedly strong export and import growth for January renews concerns about speculative inflows brought about by inflated trade deals

PUBLISHED : Wednesday, 12 February, 2014, 10:36am
UPDATED : Thursday, 13 February, 2014, 4:03am

The mainland's trade data in the first month of 2014 painted a strong yet controversial picture.

Both export and import growth beat economists' expectations, underpinned by strong demand from the US and Europe, likely boding well for the mainland's economic growth.

But the numbers from the Customs Bureau in Beijing yesterday renewed concerns about large speculative inflows through inflated trade deals, possibly putting upward pressure on the yuan and complicating interpretation of the real trade situation.

Export growth accelerated to 10.6 per cent in January year on year from a 4.3 per cent year-on-year rise in December, while imports gained 10 per cent, also faster than the 8.3 per cent growth in the previous month. The trade surplus expanded to US$31.86 billion from a surplus of US$29 billion a year earlier.

Economists were both encouraged and puzzled by the trade data because the better-than-expected numbers came in despite fewer working days last month. The Lunar New Year holidays began late January this year.

"The surge in exports is likely a result of large inflows of hot money into the mainland betting on yuan appreciation. The genuineness of the figures became suspicious again," said Liu Ligang, head of Greater China economy at ANZ Bank.

Citigroup economist Ding Shuang said, "There are reasons to believe the problem is less severe compared with last year, since in areas where data manipulation was suspected to be most rampant last year, trade growth dropped significantly.

"While trade data tends to be volatile at the beginning of a year, and we suggest looking at combined January-February growth, the January data nevertheless supports our assessment that global recovery would reduce the downside growth risks," he said.

The mainland's exports to Hong Kong, the place chosen by many Chinese firms to forge round-trip trade deals, fell 18 per cent year on year in January.

Last year, trade companies forged fake transactions to funnel more foreign capital across the border into the mainland to take advantage of a strong yuan. The situation eased after the foreign exchange regulator tightened controls on speculative inflows in May. But there have been signs that such arbitrage activities may have re-emerged.

Most economists predicted export growth almost stalled or even fell last month compared to last year.

In January last year, exports surged 25 per cent and imports gained 28.8 per cent year on year due to rampant over-invoicing at trade companies.


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The analysis downstairs is also consistent with the following argument:
A country’s current account surplus is her excess savings. So long as the excess savings is there, and rising (say, due to financial repression, and before most of the people retire), the trade surplus is always there, and rising (sometimes falling, if external demand drops) --- no matter how high or low the country’s exchange rate (relative to the US$) is.
That a rising current account surplus means the yuan is still undervalued and has yet to be revalued more, as is often suggested by many people in the Chinese economic newspapers, is I’m afraid not to the point.
Many China observers are surprised by China’s latest stronger-than-expected trade data.
Perhaps the following explains why this is the case.
‘…, no reasonable revaluation of the yuan will do much to slow the growth of China’s exports (as has always been argued by the US Congress).
The marginal labour cost of exports is small, once industrial capacity has been installed (excessive capacity in the Chinese case).
Labour costs are especially small in China, which is why so much capacity has been installed there.
If the exchange rate is raised by 25%, say, the extra yuan cost of labour will still leave it profitable at the margin to export.
The revenue from exports will still greatly exceed their marginal cost, since a large part of the total cost is the sunk cost of the original capital investment.
This is particularly true in energy and materials-intensive China, where the yuan cost of dollar-priced imported energy and materials will become lower after an appreciation of the yuan.
So even the marginal costs of production are in many cases diminished by currency appreciation.
The combination of continued rapid Chinese surplus growth under almost any exchange rate scenario is likely to prove a red rag to the US congressional bull.’
(Adapted from ‘The Bill from the China Shop’)
The yen’s massive appreciation vis-a-vis the US dollar after the Plaza Accord in 1985 didn’t stop Japan’s exports growth to the US in the next few years either.
The current account surplus is a residual of the country’s excess savings --- so long as the latter is there, the former persists.
An aging Japan means that her current account surpluses will gradually become current account deficits.
China will have the same experience in the future.
Now the gradual revaluation of the yuan against the US dollar by China's central bank is not due to China’s current account surplus, or net capital inflow, or the strive to approach the equilibrium exchange rate.
Beijing wants to upgrade her manufacturing value-chain, balance the economy by promoting more domestic consumption of cheaper imported goods (hence increasing the real inncome of her people), buy cheaper energy and raw materials from abroad, and so on.
If you don’t believe that export growth is determined primarily by factors other than exchange rates, read the following.
‘The dollar-yuan exchange rate did not change from 1995 to 2005,
and during this period China's exports to the U.S. increased sixfold,
or at a rate of about 19.6% per year.
Then, from 2005 to 2008, the value of the yuan relative to the U.S. dollar appreciated by about 21%.
China's currency was "stronger" and its exports in dollars were more expensive --- so Chinese exports to the U.S. should have fallen.
Instead, China's exports to the U.S. continued to grow at about the same pace, averaging 18.2% per year.
The only period during which exports from China to the U.S. fell to any significant extent was during the recent recession,
dropping by about one-third from late 2008 to early 2010.
The dollar-yuan exchange rate was unchanged throughout this entire period.
The obvious explanation for the decline in Chinese exports to the U.S. was the decline in demand for consumption goods in general.’
Make up your freaking mind....Isn't it all BS anyway? If bad news about the economy comes out, the government will publish better growth stats, even though they are fake.


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