More Evidence of Fake Exports and Imports; SAFE Finds $10 Billion in Overstated Invoices

Nothing new here except the government is uncovering more fraud in the export/import sector, which ranges from relatively benign (in that the act is victimless) cross border arbitrage all the way to defrauding lenders.

Here's ZeroHedge on the topic, with a refresher course in Chinese commodity financing deals.
China "Faked, Forged" Documents For Exports And Imports: At Least $10 Billion In Fake Trade Exposed

Bloomberg: China Watchdog Finds $10 Billion in Fake Currency Trade
“Some companies used the trade channel to bring in hot money,” said Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group Ltd. SAFE’s investigation “will likely further cool down hot money inflows and commodity imports could slow as banks will likely conduct more careful checks on documentation.”
I am stunned that banks are still lending in this environment. Maybe Chinese authorities leaned on banks the way Xiaoshan district in Hangzhou told banks to lend or get out of town.

The impact on commodities hasn't fully hit yet:
“Qingdao is not over,” said Chae Un Soo, a metals trader at Korea Exchange Bank Futures Co. The news will “definitely” impact demand for metals tied up in financing deals, he said.

Financial Times: China hot money crackdown reveals $10bn in fake trade
China’s currency is freely convertible for foreign trade and other current account transactions but there are tight restrictions on investment flows. For the past decade, speculators aiming to circumvent these capital controls have overstated the value of export invoices, allowing them to disguise speculative capital as income from the sale of goods and services.
Plus obtain their speculative capital from the bank and also earn tax rebates, a nice added bonus.

The way the story reads, I usually think of offshore hot money looking for a place to park in China. However, many people behind these "hot money" flows are exporters in China, and many are conducting arbitrage. Since profit margins are near zero for many exporters, their business model now consists of obtaining fraudulent letters of credit from Hong Kong and then depositing the money in high yield WMPs in Mainland China. The biggest risk to this model is a decline in the offshore yuan, which causes exporters to hoard dollars overseas and pull out dollars if possible. The drop earlier this year was supposedly the PBOC's handiwork, but the yuan fell in late 2011 and early 2012, the last time the economy suffered a similar economic slowdown.

The ever present cash crunch could become crunchier if the offshore yuan starts sliding due to hot money coming out of China.

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