Is China’s Import Surge Real?

People frequently assume that I believe you can reduce every Chinese number by some percent to arrive at the true number. However, what I tell them is that you have to dig beneath and understand the dynamics to arrive at a reasonable conclusion about what that number means and that it may be over or understated. Chinese import data is a case and point.

Chinese imports are up 17% YTD and are ripe for skepticism but in reality probably pretty accurate. However, besides the large increase which raises eyebrows, there is also the fact that payments for imports are up only 7%.  So how can we conclude that the import data is relatively accurate given the large jump in imports and the only moderate growth in payment for imports?

Import growth into China for the past few years has been flat or declining.    Flat in 2014, down 14% in 2015, and down 5% in 2016.  The 2017 growth we have seen for recent history is truly an enormous outlier.

For the past few years, Chinese importers were overpaying for imports by a relatively significant amount.  In 2015, the discrepancy between imports reported at customs and at bank payments amounted to $526 billion USD.  In 2016, this number had dropped to $271 with most of that decline coming in Q2-Q4.

This raises two specific possibilities focusing on customs reported imports. Either physical imports were under reported and payments were accurate or physical imports were accurately reported and payments were over paid.  Absent much more granular data, it is difficult to know for sure, but there is little reason to believe, for many reasons we won’t explore here, physical goods imports were under reported. This means that payments were overpaying for given level of imports.

Now in 2017, if overpayment was still a problem, we would expect to see payments go up by either a similar amount or even more. What we see however is the exact opposite. Payments have gone up by significantly less than imports.  To add to this, not only do we see payments growing much slower than trade, we see that the gap between imports and payments is only $146 billion USD and on track to report $220 billion for all of 2017.

If we believed that Customs reported imports were significantly and structurally under reported prior to 2017, it might be easier to believe that imports are over stated this year, but we have little reason to believe that.

Consequently, the moderate growth in payment actually supports the idea that Chinese import growth has surged significantly. Because import levels are moving much closer to the reported payment level, it indicates that Chinese inspectors are spending more time matching physical imports to what is paid for those imports.

Most importantly, this implies that Chinese crackdown on capital outflows primarily through gray market methods is working. It should be noted that this does no imply there is less desire, only that Chinese inspectors are doing a better job matching different physical and goods flows.  Conversely, it is likely, that Chinese import and payment data is much more accurate.

As I will say, you cannot just assume a given state about Chinese data.