Chinese Fake Imports in Order to Export Money

The plight of the Yuan continues. On one hand China is supposedly stabilizing even though imports and exports are falling. On the other hand we see that wealthy Chinese fake imports in order to export money to Hong Kong from when it can go anywhere. Bloomberg Business writes about fake Chinese imports from Hong Kong.

China’s problem with fake trade invoices appears to be getting worse.

Imports from Hong Kong surged a record 204 percent last month, data on Sunday showed, intensifying the spotlight on a channel used to get capital out of the country. While the value at $2.1 billion is relatively small, the suspected use of phantom goods to secure hard currency shows concern persisting among Chinese savers and companies that the yuan will weaken.

“As long as there is an expectation of yuan depreciation against the dollar, there will be a massive outflow of funds,” said Iris Pang, Hong Kong-based senior economist for greater China at Natixis Asia Ltd. “As long as channels under the capital account are still semi-closed, trade will remain a shadow channel for fund outflows.”

The point is that those in the know, and with the wherewithal, believe that the Yuan will continue to fall and that the glory days of the Chinese economy are over. Forex traders should pay attention when trading the Yuan versus other currencies, especially the US dollar.

Yuan Edging Lower

As trade decreases so does the Chinese Yuan. The Daily Mail reports that the Yuan edges lower due to disappointing trade data.

The yuan eased against the dollar on Monday, dampened by bearish market sentiment after China reported its exports and imports fell more than expected in April, adding to concerns about the health of the world’s second-largest economy. The People’s Bank of China set the midpoint rate at 6.5105 per dollar prior to market open, 0.15 percent firmer than the previous fix 6.5202. Spot yuan opened at 6.4960 per dollar and then fluctuated widely as traders rushed to adjust their positions after a flurry of worse-than-expected domestic economic data over the weekend.

From 2011 to early 2014 the Yuan strengthened steadily against the dollar. But since that time the Yuan has weakened, especially when the U.S. Federal Reserve announced that they would be raising interest rates and eventually did so. Today the Yuan trade at around 6.5 to the dollar which is where it was five years ago. The difference is that today Chinese exports and imports are shrinking and smart money is fleeing the country, driving down the Yuan in the process. The use of Chinese fake imports in order to export money is a signal that Forex traders should not ignore.

Where Is the Money Going?

So long as the dollar was on the rise the logical place for wealthy Chinse to put their expatriated Yuan was in dollars or real estate denominated in dollars. Now, as the Fed holds off on more interest rate increases where will that money go and how will it affect Forex rates? The Australian Financial Review looks at how wealth Chinese move money offshore where they invest in property.

As the Chinese economy stumbles, wealthy families are increasingly trying to move large sums of money out of the country, worried that the value of the currency will fall and their savings will be worth less.

To get around the country’s cash controls, individuals are asking friends or family members to carry or transfer out $US50,000 apiece ($70,000), the annual legal limit in China. A group of 100 people can move $7 million overseas.

The practice is called Smurfing, named after the blue, mushroom-dwelling cartoon characters, and it is part of an exodus of capital that is casting doubt on China’s economic prospects and shaking global markets. Over the last year, companies and individuals have moved nearly $US1 trillion from China.

Some of the methods used by Chinese to deal with the weakening Yuan are legal and make sense. For example, Chinese can buy businesses or property offshore and they can pay off debt denominated in dollars before the Yuan falls even more. The end results of all these efforts is the persistent weakening of the Yuan.