Everything about China is enormous, especially the scale of its economy.
And the scale of fraud underneath this economy may also be huge. New data suggest years of impressive export numbers were not entirely accurate.
According to the National Bureau of Statistics, Chinese export volume rose 14.7 percent in April from the same month last year. When Beijing released May's numbers this week, the 12-month export growth rate had dropped to only 1 percent.
If I were a China bull, I would like April's report much better. Why the big difference?
One reason appears to be a government crackdown on "fake invoicing." Some exporters appear to have been receiving payment for products that never existed.
This doesn't compute for most Americans because we live under an entirely different currency regime. We can move greenbacks across our borders with minimal paperwork. Not so with the Chinese yuan. Beijing has tight regulations, and bringing foreign capital into China can be difficult.
Suppose, for instance, you are a non-Chinese billionaire. You want to invest $25 million in Chinese properties. The current owners want your money. How do you give it to them? To do it legally, you jump through a lot of hoops, wait a long time, and pay hefty exchange rates.
Alternately, you can arrange to "buy" $30 million worth of Chinese fireworks. The fireworks merchant sends you an invoice for imaginary fireworks it "exported" to you. You send them dollars as payment. The merchant keeps $5 million for his trouble, gives the rest to the people you really wanted to pay and the deal is done. I'm simplifying for clarity, but this sort of thing really happens.
Fake invoicing has been a problem in China for years. The government does not like it, in part because they lose tax revenue but also because it makes their statistics unreliable. This is not helpful to long-term economic development. So now they're cracking down on the invoice arbitrage — and taking a hit to the growth numbers.
This does not necessarily mean China is on the brink of collapse. Far from it. By any rational standard, the economy is growing nicely. We just can't know how much because the fake invoicing practice distorts the data. For China, it finally became a problem too big to ignore.
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