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Is China's export boom fake?

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STR | AFP | Getty Images

Exports are regarded as the bright spot in China's slowing economy, but growing evidence suggests mainland firms are "over-invoicing" outbound shipments, inflating the trade data, say economists.

"When China's external trade data for September came out two weeks ago, we were surprised by the apparent strength of exports. The Hong Kong trade data released [on Monday] suggests that renewed over-invoicing may be part of the reason for China's strong September export data," said Louis Kuijs, chief China economist at RBS.

China's exports rose 15.3 percent on year in September, beating a median forecast in a Reuters poll for a rise of 11.8 percent, following a 9.4 percent rise in August.

In the same month, China reported that it exported $37.6 billion worth of goods to Hong Kong, while Hong Kong data revealed imports of just $24.1 billion, yielding an unusually large $13.5 billion gap.

"While there have always been discrepancies between the two sources on this trade flow, the discrepancy in September was equivalent to 4.3 percentage points of total export growth, the largest positive discrepancy since April 2013 during the previous round of over-invoicing," said Kuijs.

Read MoreChina's exports surge in September; Imports also unexpectedly rise

Widely seen in early 2013, over-invoicing is a technique by which companies inflate the value of exports, allowing them to evade capital controls and bring more funds into the country.

Why is this happening?

Last year, expectations of yuan appreciation seemed to be the key driving force. This year, the motivations appear to have shifted, said Kuijs.

"One possible motivation could be that money was channeled to the Shanghai A-share market on expectations the A share market would rise after the launch of the Shanghai – Hong Kong Connect scheme," he said.

"Such flows may help to explain the rise in the A-share market index in September in the absence of obvious good economic or financial news," he added.

The Shanghai – Hong Kong Connect, regarded as a catalyst for Greater China Stocks, was expected to launch in October.

However, Hong Kong Exchanges & Clearing (HKEx) over the weekend said it had not received the relevant approval for the launch of Stock Connect and would make further announcements when there were material developments on the timeline of launch.

Read MoreStock connect delay spooks Chinese markets

Tighter financing conditions onshore, as a result of the government's crackdown on shadow banking, could be another factor motivating companies to over-invoice, Kuijs said.

Clampdown coming

Regulators are bound to clamp down on over-invoicing of exports, as they have in the past, said Dariusz Kowalczyk, senior economist and strategist, Asia ex-Japan at Credit Agricole.

"Once they do, the Mainland's trade surplus will narrow. This will have three implications," he said.

First, the contribution of trade to gross domestic product (GDP) will decline, putting overall economic growth under pressure.

Read MoreChina GDP data: Five key takeaways

Secondly, with the economy weaker than it seems on the surface, targeted stimulus measures are likely to continue in coming months

Thirdly, the People's Bank of China will have a lower propensity to appreciate the yuan fixing.

"Depending on the timing of the clampdown, this implies a large likelihood of year-on-year GDP growth slowdown either in Q414 or in Q115," Kowalczyk said.