China's Export Boom That Wasn't

Chinese cars wait for export at a port in Dalian, Liaoning Province (China Daily/Reuters)

Chinese government figures showing a 19.8 percent rise in the country's exports for the three months to February were definitely puzzling. Due to lackluster demand from the U.S. and Europe, and banks being unwilling to lend to small businesses, the nation's factories are not, on the face of it, doing very well.

The glowing recent export figures do not match corresponding import data from Hong Kong, which is often the first destination for Chinese-made goods as they leave the mainland. The Wall Street Journal notes that while this is not the first time such a discrepancy has occurred, the mismatch for the three months through February was "greater than at any other time in recent years."

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That will not surprise regular readers of Quartz. We commented in early February that a reported 25 percent rise in Chinese exports for January was more likely a case of heightened tax and invoicing fraud than anything to do with the real economy.

The nation's trade data is often riddled with fakery. Chinese factories sometimes mislabel domestic sales as exports to falsely claim VAT rebates on overseas sales.

Another common reason manufacturers fake exports is that they are colluding with someone who wants to move foreign currency into China, perhaps to take advantage of the nation's red hot property market.

The nation's currency is tightly controlled, and foreign investors must jump through a daunting series of bureaucratic hoops to get money in. But partnering up with a factory owner who is willing to fake some export invoices is a much faster way of illicitly getting cash into China.

The wheeze works thus: the exporter sends the businessman a fake invoice for goods. The businessman pays the invoice by depositing dollars in the manufacturer's offshore bank account. The manufacturer then uses the export paperwork to get permission from his bank to convert the dollars into Chinese yuan. The factory owner may also get a fee from the investor, and can collect a VAT rebate on top.

Selling counterfeit invoices is a huge business in mainland China. Last year police in Chengdu, western China, cracked a counterfeit invoicing ring that may have cost the government 10.6 billion RMB ($1.7 billion) in false tax rebates.

So while glowing export figures burnish China's reputation as a healthy economy, trade fraud costs the government money it could otherwise spend on its people.