Companies gambling on yuan appreciation are distorting Chinese trade statistics,creating a monetary policy headache for Beijing officials and complicating government plans to liberalise the capital account.
Speculative inflows disguised as trade are causing concern because they aggravate a recent trend the sudden resurgence of hot money inflows. Some $125 billion poured into China in January and February after nine consecutive months of outflows,exclusive of hot money masquerading as trade.
Companies that cannot legally move money into the country for the purpose of currency speculation often try to circumvent Chinas capital controls by overstating trade invoices,thereby disguising investment funds as payments for goods and services sold overseas,according to economists. These firms are betting on an extended rally of Chinas currency,which has gained more than 3 per cent against the dollar since the third quarter of 2012 to hit a record high on Friday morning. Now that is even distorting trade data.
To keep the exchange rate from appreciating too quickly in the face of such bullishness,the Peoples Bank of China has stepped up its meddling in the forex market,despite repeated public promises from regulators to stay on the sidelines.
This intervention has caused Chinese foreign exchange reserves to rise by over $128 billion in the first quarter of 2013,compared with $130 billion for all of 2012,by extension pouring a tide of yuan into Chinas interbank market and applying downward pressure to short-term interest rates.
The central bank,aiming to keep rates under control,has been forced to adapt the way it manages liquidity,which has rattled the countrys equity and money markets. If this trend is sustained,it complicates monetary policy; it adds liquidity to the economy which then inflates money and credit growth and property, said Robert Subbaraman,economist at Nomura in Hong Kong.
Official trade data on Wednesday showed that Chinas exports grew by an annual 10 per cent in March,appearing to stabilise after two months of strong performance,but economists were quick to question the credibility of the figures. Compared to the rest of Asia,China stood out like a sore thumb, said Subbaraman. He said that while East Asian countries exports usually rise and fall at similar rates,in recent months Chinas rate far exceeded neighbours such as Taiwan (3.3 per cent) and South Korea (0.3 per cent). Most skeptics took particular note of the apparent explosive growth (over 90 per cent) in exports to Hong Kong and 300-plus per cent growth to bonded customs zones,despite the fact that export demand from the US and Europe remained tepid.