A surge in China's official figures for imports from Hong Kong has spurred familiar suspicions of illicit currency trading, but it has also raised an intriguing question.
Why have China's regulators allowed it to go on?
After China's General Administration of Customs (GAC) reported trade data for May this month, foreign news organizations were quick to question a 161.7-percent jump in imports from Hong Kong in yuan terms.
The London-based Financial Times said the increase in U.S. dollar terms from a year earlier hit a record 242.6 percent, "suggesting no let-up in the ploy of over-invoicing to move cash out of China."
Over the years, currency speculators have routinely overstated the value of imports to skirt China's capital controls, converting yuan into stronger dollars under the guise of payments based on inflated invoices.
"Inflating the value of imports from Hong Kong to China is an old ruse that has regained popularity this year as authorities in China clamp down on official channels of taking cash abroad," the Financial Times said.
Bloomberg News noted that the May increase of imports from Hong Kong in dollar terms had topped the previous record of 204 percent in April.
"(This) suggests China's issues with fake trade invoices as a back-door channel to circumvent capital controls is getting worse," Bloomberg said.
While over-invoicing in trade with Hong Kong has been a perennial tactic for Chinese currency speculators, it has been rampant since last December when reported imports climbed 64.5 percent, the highest rate in three years.
Analysts attribute the big increases to expectations for depreciation of the yuan against the U.S. dollar, rather than anything particularly appealing that Hong Kong has to sell.
"It really looks like capital flight," one investment bank analyst told The Wall Street Journal in January when this year's first big wave of Hong Kong numbers began coming in.
In 2013, China's State Administration of Foreign Exchange (SAFE) said it would crack down on false invoicing following similar discrepancies in trade figures, but the threat of harsher penalties had little effect.
Brexit’s impact on the yuan
The trade charade may draw more scrutiny in the aftermath of Britain's vote last week to leave the European Union, leading to heavy pressure on many currencies.
On the first day of trading after the Brexit vote, the yuan lost 0.8 percent against the U.S. dollar in offshore markets Friday, but that was relatively calm compared with drops in most other Asian currencies, Bloomberg said.
On Monday, the People's Bank of China (PBOC) lowered the yuan's daily reference rate by 0.9 percent as the currency fell to its lowest rate against the dollar in over five years under continuing Brexit pressure.
The crisis may bring more distortions to the Hong Kong trade.
GAC reports are often wildly at odds with mirror statistics from Hong Kong, suggesting large-scale fraud.
In March, for example, GAC said China's imports from Hong Kong rose over 116 percent, while Hong Kong said its exports to China fell 11 percent, the Financial Times said.
In the latest GAC report, the Hong Kong figures stick out like a sore thumb.
While imports from the autonomous territory in May more than doubled to over 16 billion yuan (U.S. $2.4 billion), China's overall imports in yuan terms rose just 5.1 percent.
The Hong Kong bubble overshadows all other changes in the GAC import data for countries and regions. The next highest increase came in imports from the Netherlands, which rose 27.4 percent.
Given the disparities and suspicions of subterfuge, it seems curious that China's government has taken no steps to stop it at a time when the People's Bank of China (PBOC) has been discouraging speculation and spending heavily to defend the yuan's value.
By the end of May, PBOC foreign exchange reserves had dropped by nearly U.S. $460 billion (3 trillion yuan) since an announced currency reform last August.
Total capital outflows reached U.S. $680 billion (4.5 trillion yuan) last year, The Wall Street Journal said. Other estimates have topped U.S. $1 trillion (6.6 trillion yuan).
Slow down transactions
In February, SAFE reportedly told banks to tighten controls and slow down their dollar-denominated transactions with customers in response to capital flight concerns.
So, why leave the Hong Kong escape hatch open for speculators?
One theory is that Chinese regulators have been using it as a reading to measure market pressures for larger currency flows.
"If you don't mess with the Hong Kong trade data, you know that you have a measurement of capital flight," said Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute in Washington.
"How would you get a measurement of capital flight otherwise? It would just go further underground," he said.
The pattern of China's responses suggests that the PBOC and SAFE have been using the volume of faked imports from Hong Kong as a barometer of what steps to take next.
Put another way, the Hong Kong numbers have served as the proverbial "canary in the coal mine," warning regulators of the capital flight dangers ahead.
The Hong Kong trade may also tell regulators what effect their measures have had.
"How do you know your actions are succeeding if you have no good data? The Hong Kong data are a great proxy for capital outflow," said Scissors. "It's a way to find out what's actually going on."
Drop in the bucket
Based on the growth in the May numbers, China's outflows covered by Hong Kong over-invoicing may have amounted to U.S. $1-2 billion (6.6-13.2 billion yuan) for the month.
That leakage is a drop in the bucket compared with the loss of U.S. $800 billion (5.3 trillion yuan) in official PBOC foreign exchange reserves since a high of U.S. $3.99 trillion (26.4 trillion yuan) in June 2014.
Scissors said the loss due to the Hong Kong fraud may be on the order of U.S. $20 billion (132.4 billion yuan) per year, an amount that China's currency watchdogs may see as affordable, considering the benefits of allowing the limited speculation to continue.
In any case, such an amount would find its way out of China in any case.
"If you stopped this, would you stop the $20 billion?" Scissors asked. "No, you wouldn't. They would find another way."
That way may have already appeared in the form of starkly unbalanced investment figures for the first five months of the year.
While foreign direct investment (FDI) in China rose only 3.8 percent from a year earlier to 343.6 billion yuan (U.S. $51.9), outbound direct investment (ODI) soared 61.9 percent to 479.3 billion yuan (U.S. $72.4 billion), the Ministry of Commerce reported.
Scissors does not rule out the possibility that China has turned a blind eye to the Hong Kong loophole so that corrupt officials and party members can move capital out of the country at will.
But by leaving the loophole open for years, China now seems to be making use of the channel for policy-making reasons.
"I assume the foundation of this, going all the way back, was corruption," said Scissors.
"People have always used this for corrupt purposes and now maybe it's a 'tell' for capital flight," he said.
So far, the explanation for the Hong Kong discrepancies is only a theory, but it may gain in credibility the longer the sham goes on.
China's customs officials and currency regulators have given no explanation for the mismatch in the trade numbers as the gap has grown since the end of last year.