Evidence Mounts That China Cooked the Books on Third Quarter GDP Growth

10/27/2014 4:49 pm EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

Since evidence now backs up claims that China’s announcement of 7.3% growth rate is cooked, MoneyShow’s Jim Jubak highlights how that undermines the improved confidence in global growth that supports the recent rally in global stocks.

More reason today to doubt China’s announcement last week that the country’s economy grew at a 7.3% rate in the third quarter.

Last week, you’ll remember, skeptics said it was unlikely that GDP grew by 7.3%—very near the official target of 7.5% growth, they noted—when other, more difficult to manipulate indicators were pointing to a slower rate of growth. For example, electric consumption grew at an annual rate of just 2.7% from September 2013 to September 2014. Rail traffic fell 6.2% in that same 12-month period.

Well, today, the skeptics have gained more ammunition from evidence that backs up claims that China’s huge increase in exports was the result of a resurgence of scams that use fake invoices to cover up illegal currency movements.

Initial trade data showed a huge 34% year-over-year surge in China’s exports to Hong Kong in September. Goods exported to Hong Kong are often intended to re-export to overseas markets so the big jump in exports to Hong Kong suggested that China’s overseas trade had indeed grown significantly. And that set the markets and many investors up to believe the 7.3% growth in GDP number when it was reported.

But data put together by Bloomberg show a huge gap between what China is reporting as exports to Hong Kong and what Hong Kong is reporting as imports from China. China’s data for September showed $1.56 of exports to Hong Kong, Bloomberg reports, for every $1 in imports reported in Hong Kong data. Hong Kong’s imports from China grew by 5.5% year-over-year to $24.1 billion, Hong Kong numbers show, while China’s exports to Hong Kong soared by 34% to $37.6 billion, according to Beijing’s data.

The most likely explanation for that $13 billion gap is that it represents fake invoices generated to disguise illegal currency trading. Companies can avoid the government’s rules on importing yuan into China by disguising the cash as payment for goods exported to foreign countries or territories such as Hong Kong. With the yuan recently appreciating, currency trading is, again, highly profitable and low risk (if you can find a way around the government rules).

For overseas investors, this new evidence that China’s recent 7.3% growth rate is cooked undermines the improved confidence in global growth that supports the recent rally in global stocks.

Today, Hong Kong’s Hang Seng index closed down 0.68% and the Shanghai Composite index was lower by 0.51%. Oil, which has been very sensitive lately to sentiment on global and Chinese growth, fell with the European benchmark Brent crude closing down 0.85% and the US benchmark West Texas Intermediate down 0.37% but holding the increasingly important $80 a barrel level at $80.71 for December delivery.

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