China’s foreign exchange regulator has uncovered $10bn in fake cross-border trade since April last year and has turned 15 cases over to police in a crackdown aimed at curbing hot money flows.
Speculators have long used inflated trade invoices as a means to skirt China’s strict capital controls and convert foreign currency into renminbi, aiming to profit from currency appreciation and higher interest rates.
The State Administration of Foreign Exchange (Safe) launched an investigation into the practice last April after several months in which official export data appeared heavily inflated by fake invoices.
China’scurrency is freely convertible for foreign trade and other current account transactions but there are tight restrictions on investment flows. For the past decade, speculators aiming to circumvent these capital controls have overstated the value of export invoices, allowing them to disguise speculative capital as income from the sale of goods and services.
Banks that buy and sell foreign exchange to clients are supposed to verify the authenticity of trade documents but enforcement is often lax. Speculators typically use hard-to-value items such as electronic circuits as the basis for their invoices, making it tricky to detect inflated shipment values.
“Many firms used forged or altered trade documents, or reused property documents to conduct fake trade,” Wu Ruilin,deputy head of Safe’s inspection department, said at apress conference in Beijing, according to a transcript.
“They used re-exporting as a tool for speculation and arbitrage, even turning it into a channel for cross-border flows of hot money and criminalfunds,” Mr Wu said, referring to the practice of exporting a shipment of goodsand then reimporting it, often through a neighbouring port. The difference between the reported value of the two shipments constitutes an illicit fundflow.
Safe has periodically cracked down on hot money flows over the past decade when hotmoney inflows have threatened to disrupt the central bank’s efforts to control the money supply and contain property or other asset bubbles.
Investors’ appetite to bring hot money into China appears to have waned this year, however, as economic growth has slowed and renminbi appreciation appears less of a sure bet than in the past.
The gap between Chinese customs data on exports to Hong Kong and Hong Kong customs data on imports from China hit an all-time high of $28bn in March last year.The gap is viewed as a proxy for how much exporters are inflating theirinvoices. But by July this year, the gap had fallen to $9bn.
Safe said it was increasing its use of “data analysis” through its electronic for exmonitoring to uncover cases of apparent fraud. Such analysis led to 353 cases of alleged fraud in the first eight months of the year, resulting in Rmb118m($19.2m) in fines.