Recent trade data from Hong Kong reveals that China’s efforts to stop investors from siphoning cash into the country disguised as export earnings has had a significant impact but the practice remains substantial.

The extent of this type of trade-based money laundering is revealed in the difference between official records of China’s exports to Hong Kong and the island’s much-lower record of imports from China.

Fake invoices
Data released this month shows that the gap between China’s trade surplus with Hong Kong and the island’s recorded trade deficit closed to US$15.7 billion in the first quarter of 2015 from $46 billion in the first three months of 2014, when over-invoicing is thought to have peaked.

This type of money laundering starts with fake invoices raised in China for exports to Hong Kong. This allows the entity or individual that raised the invoice to bring cash back onshore, circumventing China’s capital controls and allowing investors access to higher Chinese interest rates.

Chinese crackdown
The Chinese authorities cracked down on the practice in May 2014 due to concerns that the yuan, which has appreciated by over 30% against the US dollar since 2005, had become too much of a one-way bet for investors.

A stronger Chinese currency makes the country’s exports less competitive in international markets.