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China to Crack Down on Faked Export Deals

China has vowed to crack down on companies that have been secretly channeling cash into the country after a surge in capital inflows.

The clampdown follows severe discrepancies in China's export data in the first quarter that aroused suspicions about Chinese companies using trade deals to evade capital controls and bring cash onshore.

China keeps a tight grip on foreign exchange flows in and out of the country, worried that speculators could fuel asset bubbles and inflation.

(Read More: Will China's Bird Flu Put Inflation Hawks at Bay?)

But despite years of repeated campaigns to limit hot money, an apparent surge in Chinese exports in the first quarter, when other countries reported much weaker data, pointed to a resurgence in inflows. Analysts believe Chinese exporters were over-invoicing as a way of bringing more cash into the country covertly.

The State Administration of Foreign Exchange said it would issue warnings to companies that have serious mismatches between declared deal size and actual transactions in goods. If companies are unable to provide satisfactory explanations for the gaps, Safe will blacklist them and subject them to "strict supervision" until they demonstrate compliance with regulations.

Previously, the Chinese customs administration had rebuffed criticism of the export data, saying that faked trade declarations "were not mainstream".

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The SAFE statement, published late on Sunday, was the first significant action taken by the government to address the problem.

"This is clearly a sign that the authorities recognize that companies channeling inflows into China dressed up as exports is actually a serious issue, that it is happening and that they want to do something about it," said Louis Kuijs, an economist with the Royal Bank of Scotland.

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He said the new regulations should make it harder for companies to evade capital controls but that the impact on export figures might take a month to filter through. China reports its April exports on Friday and economists are concerned that over-invoicing could once again have wreaked havoc with the data.

Chinese exports in the first quarter reached 18 per cent growth year on year, though the real figure, once the effect of capital inflows is stripped out, is estimated to have been about 5 percentage points lower.

That discrepancy probably exaggerated China's overall growth in the first quarter, meaning that the economy may have expanded more slowly than the officially reported 7.7 per cent pace, which was already weaker than expectations.

The capital inflows also risk undermining efforts by the government to rein in housing prices and absorb some of the liquidity that has started to put upward pressure on inflation. After a small deficit in its capital account last year China swung to a $101.8 billon surplus in the first quarter this year, alongside a $55.2bn current account surplus.

"The portion of export data that is faked has become bigger and bigger," said Liu Yuhui, a finance researcher with the Chinese Academy of Social Sciences. "These new rules are directly targeted against the abnormalities seen in the first quarter."

Additional reporting by Emma Dong in Beijing.

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