Writing in these pages on Tuesday, my colleague Jake van der Kamp argued that the only thing driving the development of Hong Kong's offshore yuan market is currency speculation. People are only interested in the yuan because they think it's going to appreciate.
He's wrong. Speculation isn't the only thing behind the growth of yuan trading in Hong Kong. There's also tax fraud.
Glance at the data, and it looks as if Hong Kong's market in yuan trading has taken off in record time.
The amount of cross-border trade settled in yuan through Hong Kong banks each month has leapt from nothing three years ago to hit 254 billion yuan (HK$316 billion) in August (see first chart). That's equal to 47 per cent of Hong Kong's total trade - imports plus exports - for the month.
Altogether, over the past 12 months the total value of foreign trade settled in yuan through Hong Kong's banking system exceeded 2.5 trillion yuan.
At first that sounds quite impressive. But things are not quite as they seem.
Much of Hong Kong's foreign trade consists of through traffic. Typically electronic components are imported from Taiwan, Japan or South Korea, and then re-exported to mainland China for assembly. The finished articles are then shipped to Hong Kong and re-exported to the consumer markets of the United States and Europe.
But look at the breakdown of Hong Kong's re-exports by origin and destination, and you find something surprising. Over the past 12 months, the biggest single trade flow through Hong Kong was not from Taiwan to mainland China, nor even from mainland China to the US. It was from the mainland back to the mainland (see second chart).
According to Hong Kong government trade data, over the 12 months to October, HK$855 billion worth of stuff was imported from the mainland and shipped through the city back to the mainland. To put that figure into perspective, that's one-quarter of Hong Kong's exports for the period.
Some of that traffic was probably genuine. If you are manufacturing components in Shanghai and assembling them in Shenzhen, it may make good commercial sense to ship them through Hong Kong.
But most of it was routed through Hong Kong as a tax dodge. Under mainland regulations, exporters of electronic gadgetry can claim a value added tax rebate worth 17 per cent of the goods' value.
What's more, under the Closer Economic Partnership Arrangement, no tariffs are charged on goods imported into the mainland from Hong Kong, provided the importer claims a relatively small component of value was added in the city.
All that's needed then is a little imaginative invoicing, and you've got one very lucrative tax evasion scam. In all probability the goods never actually need to leave the mainland.
Working out exactly how much of this tax dodging is going on is impossible. But extrapolating from a 2008 estimate compiled by the Asian Development Bank Institute, over the past 12 months the scam was likely to have accounted for at least HK$700 billion of Hong Kong's re-exports, or 20 per cent of the city's total export trade.
And of course, if you are evading taxes by round-tripping goods through Hong Kong, whether physically or on paper, you don't want to start mucking about with foreign currencies and paying the hefty spread on foreign exchange transactions.
So it's a safe bet that all this phantom trade is invoiced and settled in yuan. And considering that there is both an import and an export leg of the trade, that means the value of yuan trade settlement associated with this dodge in Hong Kong over the past 12 months may have been well over 1 trillion yuan. That's almost half the total amount of yuan trade settled in the city.
In short, it's highly likely the size of Hong Kong's offshore yuan market has been vastly inflated by mainland tax fraud.