China Economic Update: December 2017

Uneven flows – how distortions in China’s data paint a very different picture of global trade.

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  • In our monthly updates on China’s economy, we have regularly highlighted the disparity between China’s official merchandise trade data and the equivalent data of some of its trade partners. Some of these differences are easily explained; however in some cases – most notably exports from China to Hong Kong – the differences may reflect other factors, such as financial flows masked as trade activity to circumvent capital controls. When compared over time, these distortions result in an inaccurate picture of Chinese and global trade flows and broader economic conditions.
  • As a general rule, the reported value of imports has exceeded China’s export values. Some of the differences between these measures reflect factors such as false invoicing – a method to disguise capital flows as trade activity. This is most notable in the trade flows between Hong Kong and China – with Chinese exports over-valued for most of the period between 2012 and 2016. Over-stated export values may mask unreported capital flows into the country.
  • Discrepancies between China and its trade partners are not limited to exports – with a similar trend evident for imports as well. Over-stating imports – again by false invoicing – may allow firms and individuals to mask capital outflows. When comparing the discrepancies between China and individual trade partners, there is no standout destination for outflows (unlike Hong Kong being the major channel for inflows). Instead a wide range of countries have notable discrepancies – including Taiwan, Korea, Japan, the United States and Switzerland (the five largest in 2016).
  • Masked capital flows have contributed to a tighter regulatory environment, particularly as capital flight started to accelerate over 2015 and 2016. This put significant pressure on Chinese financial markets, already stressed by high levels of leverage in the corporate sector, leading to a rolling back of earlier capital account liberalisation.
  • The distortions in historical trade data also add some risk to interpreting the strength of the Chinese and global economy. Trade data is closely watched as an early indicator of broader global economic conditions, with Chinese and partner data painting a different picture. For example, Chinese data suggests that exports to Hong Kong fell by 6.3% yoy in the first ten months of the year, whereas Hong Kong data shows an increase in imports of 6.0% yoy over the same period.

For further details, please see the attached document: