Macro Roundup: China's Trade Data Puzzle

• China's January trade data were an upside surprise, and the reasons for the jump in exports and imports are not entirely clear.

• Exports may have been boosted by expectations of tighter monetary policy.

• Commodity stockpiling and a switch to cleaner raw materials may have boosted imports.

China's January foreign trade data were an upside surprise. Given that it does not match a range of other data, it has been heavily scrutinized. While some questions have been resolved, some puzzles remain and will be resolved only with more data.

Reasons for pessimism

Prior to the release of the trade data there were some reasons we expected a fairly downbeat set of numbers. Both the official and HSBC January PMI surveys showed that manufacturers were pessimistic about the export outlook. Speculative inflows in early 2013 inflated the export numbers, and so were expected to lower the year on year growth rates in early 2014. Also, January this year had one less working day than January 2013, due to the earlier lunar new year. Hence the upside surprise in the trade data was indeed a surprise. Both export and import growth accelerated, and the trade surplus rose to US$31.9 billion.

There was a time that the foreign trade data was considered one of China's more reliable indicators, because exports and imports data can be matched with trading partners, which makes manipulation easy to spot. There were some 'hot money' inflows during the pre-2008 boom period but this was relatively minimal. However, trade flows became wildly distorted last year, as seen in the surge in reported exports to Hong Kong, which forced the customs department to pledge to investigate the matter.

A range of export subsidies announced in late 2012 amplified this effect as businesses booked fake exports to claim tax credits. The "round-tripping" phenomenon, whereby firms export from the mainland to a Hong Kong partner to claim the tax credit, which then sends it back, is less apparent this time around. Instead, export gains were broad based. Exports to the U.S., EU and Japan grew at double-digit year on year rates. Exports also grew broadly on a product basis, not just in exports of electronics (which was the product category that was used for round-tripping a year ago).

At this point it is hard to see if there is a genuine reacceleration in exports, more sophisticated tax dodging or some statistical quirk that may wash out after the Lunar New Year. It is likely that some of the export revenues reflect speculative capital, which is reentering China because of improved fundamentals and expectations of higher interest rates.