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Strong China trade growth confounds economists
Officials from China and Taiwan attend meeting in Nanjing©Getty
Chinese exports and imports rose sharply in January, confounding expectations for a weak start to the year.
Exports increased 10.6 per cent from a year earlier, while imports were up 10 per cent. Analysts had forecast flat growth or even declines for both because the base of comparison – January of last year – had been distorted upwards by rampant over-invoicing, eliciting a crackdown from the Chinese government.
On the surface, the robust Chinese trade numbers paint a very positive picture of both Chinese demand and the global economy. Investors in Asia took heart at the figures, pushing up stocks across the region and buying currencies such as the Australian dollar that are linked to Chinese growth.
But the chasm between the reported reality and the more sluggish expectations sowed doubts in the minds of some analysts. The Chinese figures also bucked the trend of more subdued January trade figures reported around Asia.
“We are left with a nagging feeling that perhaps issues such as over-invoicing have risen sharply in intensity early this year,” said Louis Kuijs, an economist with RBS.
Over-invoicing on trade has been regularly used by Chinese companies in the past as a way to avoid capital controls and bring extra cash into the country to take advantage of high onshore interest rates and steady, if gradual, renminbi appreciation.
In recent months, interest rates available to investors in China have climbed sharply. Although the higher cost of financing has fuelled concerns about the country’s growth prospects, it has also created further temptation for investors to channel money into high-yielding Chinese assets.
Analysts with ANZ said that they had detected an increase in “the round-tripping trade” between Hong Kong and China. A simple way to breach China’s capital controls, round-tripping occurs when made-in-China goods are exported to Chinese companies’ subsidiaries in Hong Kong and then imported again by the original companies at marked-up prices.
September 2013: The Chinese government is trying to increase trade with southeast Asia to boost the economies of poorer southwestern regions such as Guangxi province
It reflects “the incentives to take advantage of the onshore high interest rates and renminbi appreciation opportunities,” the ANZ analysts wrote in a note.
The renminbi gained 3 per cent against the dollar last year and it has remained steady against it this year even as other emerging market currencies have sold off.
Adding to the uncertainty about the Chinese trade data was the timing of the Chinese new year, which began on the last day of January in 2014 but fell in-mid February in 2013. That eliminated one working day this January, potentially depressing trade flows, but it may also have had the off-setting result of encouraging companies to front-load their business.
Chinese economic data in January and February has long been plagued with distortions because of the timing of the new year holiday, which leads many of the country’s factories to halt or slow production for several weeks. A clearer read on the country’s growth trajectory will emerge in March when the government publish a wider range of data that combine the first two months of the year to take account of the holiday effect.