Mis-invoicing across China borders could shrink: All eyes on HK numbers

HONG KONG – All eyes are on Hong Kong as it prepares to publish its trade data, including its cross-border trade flow with China. French banking major Nataxis says it expects Hong Kong Customs data to reveal a year-on-year fall of 10% in Hong Kong exports to China.

“The projected huge difference between China and Hong Kong’s statistics implies that mis-invoicing should have continued in March.” Nataxis says.

“There are two factors that drive the activities, namely exchange rate and interest rate arbitrage. Looking at the onshore and offshore RMB exchange rate, there is no room for arbitrage across the border as the spread has almost disappeared since late January.

“Interest rates still provide room for arbitrage, but not as much as earlier this year. The opportunity for shorter maturity has gone since the end of March. The only room left is the one-year interest rate differential between onshore and the offshore market. The gap is very thin though, at 72 bps today, compared to almost 150 bps in March.

“Mis-invoicing activities should have slowed in April, and this will reflect in the data directly. Therefore we expect China trade data to be less distorted in April.

“Looking forward, we expect that fake trade activity should pause until there are factors to open up arbitrage opportunities again. The onshore interest rate should be stable as liquidity is finely controlled by the central bank.

“Offshore RMB interest rates are also expected to stay low as demand for RMB loan nowadays in Hong Kong is small because Mainland corporates can borrow at a lower cost domestically.

“Unless there is a sharp depreciation of the USDCNH, which could push up the offshore interest rate sharply, we do not expect the exchange rate and interest rate spreads across the border to widen again. That is, the mis-invoicing should be muted for now.”  www.natixis.com (ATI).