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Economy

China's elastic yuan rates give rosy tint to foreign investment

Unusual dollar conversion methods downplay trade war impact

Tesla's Gigafactory is seen under construction in Shanghai. Critics are casting doubts over China's foreign investment figures published by the Commerce Ministry.   © Reuters

BEIJING -- China's Commerce Ministry may have inflated its monthly foreign direct investment figures to show that the trade war with the U.S. is not discouraging foreign companies from making outlays, according to a closer look at the data.

China, which once published foreign investment only in dollars, began releasing the tally in both the yuan and the greenback in January 2014. Though the figure given in China's currency represents the official one, most economists and foreign media keep a closer eye on the dollar amount.

The Commerce Ministry reported that FDI rose by 1.9% on the year in August 2018 to 63.7 billion yuan, or by 11.4% in dollars to $10.4 billion. But market exchange rates placed the dollar figure around $9.3 billion at the time, representing a year-on-year decrease as the U.S.-China trade war began to bloom.

The ministry attributed the discrepancy to each investment being converted based on the exchange rate at that time. Still, the average rate used by the ministry in August 2018 came to 6.11 yuan per dollar, putting the Chinese currency 12.1% stronger than it was on the market.

"The yuan was unusually strong" under the ministry's calculations for August 2018, said one expert on the Chinese economy. "The currency was strong even compared to the exchange rate used to calculate China's balance of payments."

Some think this strength resulted from a new economic policy outlined by the Chinese Communist Party Politburo at the end of July 2018, which included a call for stable investment in response to additional tariffs by the U.S. earlier that month.

Padding the yuan's value kept foreign investment from falling in dollar terms just one month after the Politburo's policy decision, an outcome that would have highlighted the economic impact of the trade war and embarrassed the Commerce Ministry.

Unusual currency estimates appear in 56 of the 70 months since January 2014. If China's currency had weakened on the year in the market, then the ministry calculated a stronger yuan than did the Shanghai exchange. Conversely, if the currency had strengthened on the year, then the agency assumed a weaker yuan.

The yuan's value generally has declined from its recent peak in January 2014. Because a weak yuan means total foreign investment goes down in dollar terms, the Commerce Ministry is believed to be making calculations using a stronger yuan more often.

Commerce Ministry rates were 3.7% apart from market exchange rates in 2018, the biggest annual gap between 2014 and 2019.

In dollar terms, monthly foreign investment in China has fallen on the year just once between August 2018 and October 2019. This is unusual, given that the figure tends to swing wildly month to month.

Chinese President Xi Jinping is cracking down on doctored economic data by regional governments, launching audits in October. Data published by the national government could face greater scrutiny as well.

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