The China over-invoicing export distortion is back (sort of)

The China over-invoicing export distortion is back (sort of)

Izabella Kaminska | May 08 07:04 | 2 comments Share

Let’s face it. Chinese national statistics are to some degree always treated with a pinch of salt by analysts and economists alike.

That said, there’a s big difference between massaging subjective inputs in statistical methodologies and failing to adjust for misleading economic activity driven by actual economic behaviour.

Case in point, Chinese export figures, which according to Capital Economics are now suffering the consequences of a bad comparative due to last year’s carry-trade inspired over-invoicing fad (since cracked down on by the state).

As Julian Evans-Pritchard noted about China’s latest export figure data on Thursday, exports simply are not what they seem (our emphasis):

China’s trade data show signs of recovery but continue to understate the true health of the export sector. Export growth recovered from -6.6% y/y in March to +0.9% last month. Although this was stronger than most had expected (the Bloomberg median was -3.0%; our forecast was -2.0%), the weak growth is still likely be read by some as a sign of strain in China’s export sector. However, April’s low export growth was, as in previous months, largely caused by rampant over-invoicing of trade to avoid capital flows last year, which has created an artificially strong base for comparison. These distortions appear to have resulted in exports to Hong Kong and Taiwan, via which most of the over-invoicing took place, contracting by 30% in y/y terms last month.

In contrast, exports to the rest of the world grew 10.2% y/y, which suggests that external demand remains healthy, a view supported by strong export growth in Korea and Taiwan last month. Import growth also recovered, from -11.3% y/y in March to +0.8% in April, but remains weak. (Bloomberg -2.1%; CE -2.0%). Import growth appears to have suffered from similar distortions with much of the weakness concentrated in imports from Hong Kong and Taiwan, which contracted 12.4% last month.

That said, imports to the rest of the world grew by just 2.3%, which hints at a legitimate slowdown in imports. Finally, the trade surplus rebounded further from $7.7bn in March to $18.5bn last month. Looking ahead, healthy demand in external markets should continue to support exports.Moreover, because Chinese officials appear to have cracked down on over-invoicing around this time last year, the distortions that have pulled down headline export growth look set to fade. In contrast, we expect import growth to remain relatively weak as slowing property activity weighs on commodity imports. As a result, China is likely to continue to post large trade surpluses this year.

In short, things may be much better than they seem.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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