Chinese Trade Data Manipulation: Innocent "Excel Glitch" Or Something Far More Sinister?
There was a time when talking about fabricated Chinese data was relegated to the darker corners of polite society, along the lines of saying that the Fed was manipulating stocks or that the BLS was fudging employment data upward: everyone knew it was happening, but nobody dared to say it in public - after all suggesting such things happened discredited the entire status quo system built on a pyramid of lies (and if China does it, the US and everyone else likely does it too) and exposed one to being labeled a conspiracy theorist. That is no longer the case. Following the last three months of far stronger than expected Chinese trade data, the fact that China's data is openly manipulated is no longer disputed by anyone - either the press, or the analyst community. Case in point, last night's surging Chinese imports and exports. On the surface: great news. Below the surface: fabricated mumbo jumbo, like virtually everything else derived from the goalseek function in China_Econ.xls, or US_seasonal_adjustments.123.
Incidentally China is not even trying any more: as we pointed out over a year ago, catching trade data fudging is the easiest to spot, as one's nation exports have to equal another nation's imports, period. It is a zero-sum game. Yet over the past several years, this has not happened (and certainly not at the global level, considering the entire world was somehow a net exporter). The discrepancy has gotten especially bad in recent months however in the mainland, especially when trying to reconcile Chinese trade data with that from Hong Kong or Taiwan.
First to debunk the Chinese random numbers was SocGen:
China’s export growth reaccelerated to 14.7% yoy in April from 10% yoy in March, well above expectations (Cons. 9.2%; SG 7%). Import performance was even more stellar, rising 16.8% yoy (Cons. 13%; SG 9%). Both figures were again at odds with the unambiguous disappointment in Korean and Taiwanese data as well as in China’s own purchasing managers’ indices from the same month.
Head-scratching discrepancies in bilateral data comparison persisted on both sides of the ledger. Compared with the data from Taiwan – the only economy besides China that has published the complete set of April data – growth of mainland exports to Taiwan was 57.7ppt faster based on China’s data (+49.2% yoy vs. -2.7% yoy) and that of mainland’s imports from Taiwan was 58.6ppt faster (+55.7% yoy vs. -2.9% yoy)! The gaps narrowed only marginally from March. In previous months, the most notorious data inconsistency was with Hong Kong.
Although Hong Kong has not published its April data, the reported export growth of 57.2% yoy by China’s customs continued to look too good to be true.
Aside from outright fraud, is there any justification for the data "drift"?
our observation from the trips to the mainland led us to believe that there is indeed a large amount of speculative capital flows. Nearly all corporates we met admitted that they were conducting some forms of interest rate arbitrage on the expectation of further yuan appreciation. We estimate the distortion to headline trade growth (both exports and imports) to be about 3-8ppt.
Another way to visualize how China is using Hong Kong as a capital flow sieve is the following chart from Diapason showing net exports to Hong Kong and export to the rest of the world ex-HK. In short - it is all Hong Kong.
This should raise some red flags because while China manipulating data is nothing new, there appears to be a far more sinister play at hand here, especially with the data manipulation so overt nobody can ignore it any longer: namely an attempt by China to hide blistering "hot capital" inflows generated by the global printing press behind the manipulated trade data. Reuters is on the beat:
China's central bank signaled on Wednesday it was prepared to change its monetary strategy to fend off inflows of speculative capital, as Beijing struggles to control a tide of cash washing in from overseas markets.
The move came as April exports blew past expectations, which appeared on the surface to indicate that both China's economy and global demand were on the mend. But economists were quick to suspect the figures were artificially inflated by investors who were disguising speculative bets on the yuan currency as trade payments.
Faced with the risk that such inflows could cause the yuan to appreciate so quickly that it destabilizes exports and the broader economy, the People's Bank of China (PBOC) has begun intervening heavily in the domestic currency market this year, buying up dollars and selling yuan.
This leaves the question of how to keep the yuan it has sold from distorting domestic markets.
As a reminder, it is the broken dam of Chinese runaway inflation, which can no longer be moderated by any means: legitimate or manipulated, that sends the Politburo scrambling and demanding an end to QE out of the US or anywhere else: this is precisely what happened in 2011, but not before soaring Chinese inflation sent demand for gold through the roof and hitting a record over $1900.
For now, China appears to be at the "manipulated" stage of covering capitlal inflows. Soon, however, these will no longer be sufficient.
The move suggests that the PBOC is preparing to make systematic longer-term cash drains from the money supply to blunt the impact of hot money flows, with a potential knock-on impact on interest rates, market sentiment and economic growth.
The announcement came days after the country's foreign exchange regulator released new rules to crack down on inflows of hot money disguised as trade payments.
The last time the government made technical adjustments to its money management methods in February, domestic equity markets swooned as investors bailed out of stocks, worried that the changes heralded a wider monetary tightening that would constrict growth.
But the PBOC must balance the risk that the change will negatively impact markets against the distorting effect the inflows are having on the wider economy, in particular on exports, and by signs that capital is once again being misrouted internally into speculative channels like property instead of the real economy.
So just how big of a "hot money" problem are we talking. Big:
A Reuters estimate of hot money flows based on official data indicates that as much as $181 billion in speculative cash may have entered China in the first quarter, fueled in part by loose monetary policy from the United States and Europe. And that estimate likely understates the true figure, since it doesn't account for inflows disguised as trade payments.
$181 billion per quarter is some $60 billion per month - that's nearly the entire amount of liquidity injected by the Fed in the Q1! And that was before Japan joined the printing fun
So how does this tie in to manipulated Chinese trade data again? Simple:
While China's capital account is tightly restricted, it is not hermetically sealed, and some of the speculative inflows are conducted through legal channels.
But there are two major points of concern. One is that domestic trading companies are betting too much on further yuan appreciation, to the extent that they are borrowing the dollars they need for trade with foreign companies in order to increase their yuan stockpiles, which most economists see as unsustainable.
The other is that companies are falsifying trade transactions to get their hands on even more yuan, muddying macroeconomic indicators and embarrassing regulators.
Official data showed that April exports grew by 14.7 percent from a year earlier, well above expectations of 10.3 percent, but the numbers only fueled skepticism that financial maneuvering by exporters and speculative inflows are masking weakness in real demand.
Particularly suspicious were figures in both March and April showing explosive growth in exports to Hong Kong and bonded trading zones, that appeared completely disconnected from export growth to ultimate destination markets in the U.S. and Europe - and from tepid export figures for neighboring Asian economies.
For now Reuters does not see all of the above as a reason to panic:
Liu Junyu, a bond and money market analyst at China Merchants Bank in Shenzhen, said that the market did not read the PBOC's move as a portent of more drastic tightening measures like interest rate hikes or increases to reserve requirement ratios at banks, both of which would make more profound and durable adjustments to base money supply that might choke off China's economic recovery.
"Given so much weak economic data and recent dubious trade data, the PBOC will probably keep monetary policy unchanged and neutral," he said.
Perhaps: but if all it took was just one Fed for China to be forced to use all channels to mask the true latent inflation imported courtesy of insolvent "developed" G-7 nations, what will happen when the full impact of Japan's $75 billion per month washes ashore month, after month, after month? And what happens when the BOE joins the party?
If indeed the PBOC is stuck and unable to tighten conditions (which would also backfire as the global credit carry trade suddenly sniffs out higher Chinese yield), look for simmering Chinese inflation to finally spill over. When that happens, keep an eye on gold, which incidentally is now at the same level it was at time in late 2010 and early 2011 when China could no longer mask that it has a big inflation problem, and which, despite what clueless sellside analysts will tell you, is and always will be the best inflation hedge.
Just ask 1+ billion Chinese and a like amount of Indians.