As goes China, so does the world? In that case, the news is not that good. Trade data out of China managed to depress investors Wednesday morning, but what's behind it may be even worse than they think.
Dollar-denominated exports fell by 4.1% year on year in May, a faster drop than April's 1.8% decline. It was also worse than expectations of a 3.6% fall by analysts.
By contrast, renminbi-dominated exports actually increased by 1.2% year on year last month, stressing the importance of China's shift towards increasing the use of its own currency in foreign trade and the depreciation of its currency. Still, this too was below analysts' expectations of an advance of 1.5%.
However, imports into China surprised on the upside, declining by just 0.4% in dollar terms vs. April's 10.9% plunge and compared with analyst expectations of a 6% drop. Bear in mind that in March, Chinese imports fell by 7.5%, in February they were down by 13.8% and in January they tanked by 19.2%. So May's figure looks really good by comparison, right?
"Rising import volumes suggest domestic demand momentum has held up through May," said Luis Kuijs, an analyst with Oxford Economics.
But there may be another explanation for the better-than-expected imports figure. The August 2015 devaluation of the Chinese currency may have spurred Western companies to trade more in renminbi, but it equally spooked Chinese investors. This means they have been looking for ways to shift their assets abroad and into foreign currencies.
One way of doing that is a practice known as "over-invoicing" -- that's companies declaring more imports than they actually buy, in order to be able to transfer the money abroad and exchange it in foreign currency without falling foul of capital controls.
Hong Kong is their preferred venue for doing that, and calculations by the Financial Times based on China's General Administration of Customs data show that imports from Hong Kong surged 242.6% year on year in May. It is impossible to understand what goods Hong Kong can export to China to justify such a surge, so the only reasonable explanation is that it has to do with over-invoicing.
But this practice is hard to pin down, as is the practice of lending money to subsidiaries situated abroad for the same purpose, namely taking money out of China by getting around capital controls that cap the amounts that individuals can shift to foreign countries.
Hong Kong is where the first offshore center to develop personal services in renminbi opened, back in 2004, and it is also where the Chinese Finance Ministry issued the country's first renminbi-denominated bond offshore, in 2009. A year later, the first offshore renminbi-denominated product platform was created, also in Hong Kong.
Another reason why the smaller-than-expected fall in imports in May doesn't make sense is the fact that, according to calculations by HSBC analysts, around 40% of the Chinese imports are used in its processed exports. So any big discrepancy between the export and import figures is odd.
We will get other data out of China in the coming days, such as consumer price inflation tomorrow and foreign direct investment on Friday. However, they are unlikely to show that the tide is turning for the world's second-largest economy, so investors should expect more disappointment.
Here are some Real Money stories on what is likely to influence the markets in the short term, which could help you with your investment decisions: