Distortions galore make China’s trade data an unhelpful indicator of the broader economy
February 21, 2014 Leave a comment
Stay Away From China’s Trade
ALEX FRANGOS
Feb. 12, 2014 2:37 a.m. ET
Markets were girding for another negative Chinese economic data point. Instead what they got was more distortion.
China reported exports in January unexpectedly jumped 10.6% compared with a year earlier, accelerating from December’s pace. It was a sign that the positive export momentum seen since the middle of last year is continuing. Imports rose a similar amount, indicating that China’s domestic industrial-construction complex is still hungry for raw materials. The Australian dollar, seen as a proxy for Chinese resource demand, predictably rose on the news.
Now for the caveats. The first quarter of the year is always the hardest to read because of the Lunar New Year, China’s biggest holiday. In theory, that it fell this year in January, rather than in February as it did in 2013, should have hurt January’s trade reading in comparison with a year earlier. But it’s also possible factories rushed to get work done by the end of the month, while last year they had well into February to close order books before the New Year.
Another smoke screen is caused by cross-border businesses’ “overinvoicing” or “underinvoicing” the value of trade. That lets them disguise money as goods and smuggle it around China’s restrictions on moving capital in and out of the country. The same thing happened last year and has made the trade data less and less reliable.
It isn’t hard to see why businesses cook the books this way, given rising interest rates on the mainland. E-commerce giant Alibaba, for instance, this week said it will offer a wealth-management product that pays 7% a year, with a principal guarantee. Trust products, like the one tied to a coal company that was saved from default last month, can pay up to double digits.
Meanwhile in Hong Kong, interest rates are tethered to the Federal Reserve by the territory’s currency peg. Cash earns next to nothing. And if you are out of cash, you can borrow cheaply. Property lending is in a mini slump, so Hong Kong banks are desperate to find other customers. It’s notable that trade finance provided by Hong Kong banks rose more than 40% in each of the past three quarters.
Investors love an arbitrage opportunity, and Chinese traders are in a unique position to get around China’s capital controls to take advantage. For everyone else, it makes the world’s second-largest economy even more inscrutable.
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