On paper, China's trade surpasses U.S. - but let's get real

Containers are loaded onto a ship at Qingdao Port on November 7, 2013 in Qingdao, China.

According to the state-run China Daily, China’s trade in 2013 was worth 4.1 trillion dollars. US trade in 2013 is estimated to be 3.9 trillion. But according to Tom Holland, economics columnist at the South China Morning Post, "If you actually break down the Chinese numbers, you find that the third biggest source of Chinese imports is China itself."

So how does a country import products from itself?

Here’s one way: If you’re a Chinese electronics manufacturer, you get a 17% tax rebate on all the goods you export. -That includes exports to Hong Kong, right across the border. "On the other hand, if you import goods from Hong Kong, under a trade agreement between the mainland and Hong Kong, you don’t pay any tariffs," says Holland.

So now you know the rules of the game -  here’s how it’s played: A Chinese company loads a ship full of components and sends it on a short voyage to Hong Kong, securing a 17% tax rebate for all of it. After it arrives, the same ship then heads back across the border to China, without paying any tariffs. It's money in the bank for Chinese companies, and for the country as a whole, bigger trade numbers. If you take these meaningless imports and exports out of the picture, China’s real trade figure last year lags behind the US.

But that's not the only way trade figures are distorted in China. China’s government makes it hard for companies to bring money into the country. One way companies get around this is to lie to the government about the value of goods they export. For example, a company exports a million dollars worth of basketballs to Hong Kong, but its official invoice says it’s worth two million. The basketballs arrive to Hong Kong, the company’s office there sells a million dollars worth of basketballs, and then it sends an additional million dollars back to headquarters in the mainland to balance the books - money that can be spent any way it sees fit.

Beijing economist Michael Pettis has seen this time and time again. "That means that the amount of exports you record are going to be false," Pettis says. "You’re going to increase the amount of exports in order to disguise capital inflows."

And this elaborate scheme manages to distort China’s trade figures even further. So why doesn’t China’s government crack down on all of this? "Over time, the mainland authorities have tried to reduce the incentives for this sort of practice, but in many cases, it’s the government-linked companies that benefit," says Tom Holland.

And the country as a whole benefits from the claim that China has again surpassed the US to achieve another economic milestone.

Except in this case…it hasn’t.

About the author

Rob Schmitz is Marketplace’s China correspondent in Shanghai.

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