Not again

Widespread caution over Chinese economic data means that when numbers provide a positive surprise， loud grumbles from hardened skeptics run through the airwaves. January trade data would have had calmer observers toning the volume down.

Exports from China surged 10.1% from a year earlier despite overall predictions of at best flat growth or even a decline. Separate surveys of economists by Bloomberg and The Wall Street Journal had median export growth predictions of 0.1%. A Reuters’ poll put forward 2%.

Not long after China customs released the data on February 12， speculation was rife that the numbers were indeed questionable， possibly hinting at a recurrence of the over-invoicing that grossly distorted the same set of data a year earlier. At that time， Chinese companies were caught inflating the value of exports to bypass currency controls and bring yuan into China.

Although that theory cannot be discounted completely there is some evidence to support suspicions the rosier take on the data is that demand for Chinese goods is coming back from developed markets. That is good for those who want China to hit the magic 7.5% GDP growth target this year and a welcome boost to the global economy overall.

Analysts’ immediate reactions to the data were dominated by those two ideas.

Invoice trickery by traders last year led to a reported 25% rise in imports from the year prior， meaning the base figures for this January were extremely high. Also， the seven-day national Lunar New Year holiday started January 31 this year versus February 9 in 2013， resulting in factory closures at least a week before the end of the month. Weak manufacturing and service industry surveys reinforced the view that the economy was slowing.

So what exactly was behind the surprisingly high exports reported for January？

Knowing that Lunar New Year fell across months and mindful of not having a full set of staff when production restarted after the break， factory owners likely brought some business forward. “The earlier timing of China’s Lunar New Year in 2014 means that more shipments were probably front-loaded to January than in 2013， likely at February’s expense，”UBS economist Wang Tao wrote in a note. That alone however can’t account for the surge in shipments.

The answer could lie with fake orders. “We are left with a nagging feeling that perhaps issues such as over-invoicing have risen sharply in intensity early this year，” Louis Kuijs， senior China economist with RBS in Hong Kong， said in a note in reaction to the data.

In a practise known as round-tripping， a company in mainland China exports goods to a subsidiary in Hong Kong and then ships those same goods back to China， arbitraging on either exchange rates or interest rates.“The round-tripping trade between Hong Kong and China [has] picked up again since Q4 2013， reflecting the incentives to take advantage of the onshore high interest rates and RMB appreciation opportunities，”analysts at ANZ Bank in Hong Kong said in a note.

But other data that would confirm the view that such practices were the dominant force behind the surge in trade numbers are inconclusive， or absent. One way of reading for overinvoicing is to check China export data against import data from other territories such as Hong Kong， particularly high-tech goods which are preferred because they are valuable and easy to ship.

Yet mainland exports to the city actually fell 18.3% year-on-year in January， while shipments of advanced goods were also down. “We conclude that there are no clear signs of hot money inflows from the January trade data，” said Bank of America-Merrill Lynch analysts.

What this points to， according to several analysts， is that there could be genuinely higher demand for Chinese goods. “Growth of exports to developed countries not likely to be associated with over-invoicing rose substantially in January. Thus， while we remain puzzled by the strength of the export data， they seem to point to actual strength，” noted Kuijs from RBS.

That demand came overwhelmingly from developed markets. Export growth to the United States， European Union and Japan （G3） accelerated to 15.1% year-on-year in January from 3.7% in December， the highest rate since August 2011， according to a note by HSBC Research.

“We saw shipments to G3 and non-G3 markets rebounded simultaneously in January， but it was demand from G3 market that made the stronger comeback thanks to the improving economic situation in developed economies，” wrote HSBC analysts. With emerging markets under pressure from the flight of global capital outflows following a scaling back of quantitative easing in the US， a pickup in orders from China’s much bigger developed markets is a welcome boost.

For now， the outlook on 2014 exports remains cautious. Hong Kong import data for January is expected to give a clearer picture of the strength of over-invoicing. Economists are unsure of what this means for the health of Chinese exports.

“The surprising strength of January’s trade data likely overstates the true health of the Mainland exporting sector，” said Wang at UBS. “As such， for a more accurate assessment of China’s export conditions， both January and February data should be reviewed together.”