China's crackdown on hot money inflows may ease some of the speculative pressure driving the yuan higher and skewing credit conditions, but likely at the expense of revealing the extent to which exporters are struggling for business as the global economy sags.
Beijing's determination to stop rampant invoice inflation is crucial to its efforts to curb a surge in capital inflows that must happen if it hopes to avoid tightening policy settings in the face of a drawn out deterioration in global economic conditions.
But stamping out shady practices in the way companies account for imports and exports could reveal just how dire business conditions are for the firms that drive manufacturing in the world's second biggest economy.
Lu Ting, head of Greater China economics at Bank of America Merrill Lynch, reckons China's trade surplus might only be a tenth of its reported US$61 billion for the January-April period, if correct figures are used. Lu and other economists noted abnormally strong mainland exports to bonded areas and regions such as Hong Kong and Taiwan. They suspect the exports to the areas were used to bring in "hot money" to bet on yuan appreciation and take advantage of the interest rate gap between the mainland and developed economies.
The State Administration of Foreign Exchange (SAFE) tightened rules on foreign exchange management this month to curb speculative capital flows disguised as current-account transactions.
Fast capital inflows fuelled a 34 per cent surge in foreign exchange in March from a year earlier, outpacing a rise of 15 per cent in yuan-denominated loans, complicating the People's Bank of China's liquidity management, UBS Securities found.
"Everybody believes the export data were problematic. Strengthened management by SAFE would help export data return to normal levels, but the effect remains to be seen," said UBS economist Wang Tao. She estimated January-April exports may have expanded just 9 per cent instead of the 17 per cent reported by customs.
The customs bureau and the Ministry of Commerce said they would investigate the unusual trade activity.
Global trade appeared to have virtually ground to a standstill earlier this year, according to Carl Weinberg, chief economist at High Frequency Economics in New York, who cited International Monetary Fund data.
UBS cut its forecast for Chinese growth this year to 7.7 per cent from 8 per cent, citing weak export momentum.
It said export orders continued to drop in recent months, while the yuan had appreciated by about 6 per cent on a trade-weighted basis, developments that do not bode well for exports in the coming months.