Does RMB Appreciation Give Rise To More Round-Tripping Trade?

The author is ANZ greater China chief economist Li-Gang Liu

Last year we have run a series of articles highlighting the issue of over-invoicing in Hong Kong  and Mainland cross-border trade and its linkage to Hong Kong’s loan growth. The volume of Mainland and Hong Kong trade deviated from the historical pattern and surged in the period of the fourth quarter of 2012 to the first quarter of 2013.

We estimate that round-tripping and value-inflated trade via Hong Kong abnormally contributed 34% of China’s export growth in the first quarter of 2013. Hong Kong’s round-tripping trade was responsible for China’s capital inflows and added pressure to RMB exchange rate appreciation.

The December 2013 data indicates this pattern re-emerges again. The statistical discrepancy between China’s exports to Hong Kong and Hong Kong’s imports from China reoccurred. For the fourth quarter of 2013, round-tripping (Hong Kong’s re-exports to China originated from the Mainland) continues to represent 51% of Hong Kong’s total exports to China, higher than 49% in the fourth quarter of 2012 and 50% in the first quarter 2013. In fact, the re-export value in October was historically high of HK$90 billion.

However, the throughputs and exports statistics of Shenzhen did not repeat the abnormality in the same period. The data suggests that while the problem of over-invoicing has not intensified compared with last year, round-tripping continues to dominate in the cross-border trade.

Round-tripping trade rose to HK$955 billion in 2013, 71% higher than that of 2009 with HK$560 billion, the year prior to the launch of the operation for RMB cross-border trade settlement in Hong Kong.

The pace of growth of round-tripping trade is faster than that of Hong Kong’s total exports to China that include goods originated from the rest of the world (54% increase between 2009
and 2013) and also faster than that of total exports of Hong Kong (44% in the same period).

Our previous study also indicates the role of trade financing in Hong Kong’s loan growth. In 2013, the total exposure to Mainland non-bank entities by Hong Kong’s banks continues to explode. As of the end of September, such exposure stood as HK$2.2 trillion or about 35% of Hong Kong’s total loan outstanding.

While data for December is not available yet, we can reasonably expect that the exposure will grow further in the fourth quarter, judging from HKMA’s data series on loans and advances. Meanwhile,
Hong Kong’s RMB deposits reached RMB827 billion. Data suggests a strong co-movement between Hong Kong’s CNH deposits and round-tripping trade. This independent observation seems to have reflected a series of related and latent activities.

The rising re-exports, surges of Hong Kong’s loan growth and CNH deposits, and CNY appreciation could be different pieces of a puzzle. Based on market anecdote, it is possible that Hong Kong’s banks provide U.S. dollar trade financing to fund imports from the Mainland, resulting in capital inflows to

The goods in Hong Kong then re-export back to China, causing the climb of cross-border trade in the
past few years. Through re-exporting back to China and settling in RMB, the traders receive the money and they can use them to close the U.S. dollar liability position. If they choose to keep it in RMB instead of immediate conversion back to U.S. dollar, the funds become CNH deposits.

However, it is interesting to note that the round-tripping trade started to lose momentum after reaching the peak in October. December reported a 7.2% year-onyear decline in Hong Kong and China and Hong Kong re-exports, compared with 9.9% gain in October.

In value terms, the re-exports climbed to a record high of HK$90 billion in October and started to decline to HK$81 billion in December. While Hong Kong’s RMB deposits also hit the record high of
RMB860 billion, the monthly increment also declined alongside that of round-tripping trade.

The inter-link between round-tripping trade, CNH deposits, and Hong Kong’s loan exposure to Mainland entities coincides the movement of RMB exchange rate. After a strong appreciation in fourth quarter 2013, the RMB against the U.S. dollar became flat in January.

In addition to the exchange rate effect, the Chinese New Year seasonal effect could add further distortion to Jan-Feb trade statistics. In 2013, there were five consecutive full working weeks in
January-February while we have only three full working weeks in 2014 before the holiday which occurs in the last week of January.

The rise of RMB as a trade invoicing and financing currency has facilitated capital flows embedded in trade activities. The round-tripping trade has become an avenue to fuel such activities, which are also fuelling China’s credit growth, led by the wide gap of onshore-offshore yield and RMB’s steady appreciation.

If China’s monetary policy maintains the current tightening bias while the U.S. dollar base rate stays at the low level, Hong Kong’s U.S. dollar loan growth will continue to co-move with the trend of RMB appreciation.

Lastly, China will release January economic figures this week. We expect the CPI to rise 2.3%, down from 2.5% in December. The PPI will likely drop further to -1.6% versus -1.4% in December. China’s exports and imports are expected to report lower headline growth in January, with 1.6% gain for exports and 7.5% for imports.

(The article has been edited for clarity)