A sudden swell in China's exports of gold and jewelry may signal a resurgence of speculative currency inflows through inflated trade receipts, raising the prospect the central bank could again act to weaken the yuan and punish speculators.
Trade data this weekend will be closely watched for further evidence of illegal cross-border arbitrage, after September data showed a substantial gap between what China said it exported to Hong Kong and what Hong Kong said it imported from the mainland.
Inflated export receipts are one way to circumvent strict controls on bringing money into China. Speculators may be hoping to profit from a rising yuan or the imminent link-up between the Shanghai and Hong Kong stock exchanges.
"Precious metals contributed to the monthly jump and that is a very easy candidate for over-invoicing," said Chang Chun Hua, China economist at Nomura based in Hong Kong. "But, like commodity financing earlier this year which saw authorities crack down, this gap should shrink in the coming months."
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Inflows of so-called hot money looking to profit from the steadily appreciating yuan prompted a surprise intervention by the People's Bank of China (PBOC) in February, which drove the yuan down by nearly 4 percent by the end of May, scaring off speculators but also punishing poorly hedged investors and companies.
If evidence that such inflows have resumed continues to mount, the central bank may be tempted to deliver another reminder that the Chinese currency is not a one-way bet.
Chinese exports to Hong Kong, where over-invoicing is typically most pronounced, outstripped Hong Kong's recorded imports from China by more than $13.5 billion in September, according to a note from Nomura on Tuesday, roughly double the average monthly gap for the previous eight months of the year.
Jewelry and precious metal exports jumped 678 percent year-on-year or $9.4 billion, potentially providing evidence of a rise in fake trade flows, economists at ANZ in Hong Kong said in a research note on Monday.
A media report last week said authorities were investigating suspected irregularities in the surge in precious metals exports.
China launched a crackdown on falsified invoicing in 2013, and in September the currency regulator said it had stamped out the practice after uncovering $10 billion worth of fake trades.
'A' Shares link?
Most analysts expect gains in the yuan, which has risen around 2 percent since May, to be more modest this year than in 2013. But Chinese fixed-income yields remain higher than much of the region, and even modest appreciation will likely outstrip neighboring currencies as the end of quantitative easing pulls money back to dollar.
If speculative money is back, it could also be targeting "A shares" on the Shanghai stock market, otherwise restricted to domestic investors, to benefit from an expected bounce from the postponed launch of the Shanghai-Hong Kong Stock Connect.
Underscoring the demand for yuan assets, Hong Kong's quota under the Renminbi Qualified Institutional Investor program, a legal means for foreigners to invest in A shares, was exhausted as of September, which may have driven some investors to use illegal routes.
Shanghai's A shares index rose 5.75 percent in September.
The Connect or "through train" scheme, which will allow global investors to trade Chinese shares via Hong Kong for the first time, did not launch as expected in October and may now be delayed for months.
"We may see over-billing cool down in the coming months as the stock link program has not obtained approval according to HKEx's statement released on Oct. 17, while China's authorities could crack down on such activities," said Gao Qi, a Singapore-based trading strategist at RBS, in a note last week.
If money did flow in on the back of the exchange tie-up, China's October trade data release on Saturday may already begin to reveal a correction in the export-import gap with Hong Kong. But if the gap persists, the central bank may consider action.
"We believe that the authorities, including the PBOC, are closely monitoring possible resurrection of cross-border financial arbitrage and non-genuine trade activities," ANZ economists wrote in their note this week.
"We should pay attention to possible consequences of the discrepancy between Hong Kong and Mainland China's trade data."