Double invoicing and the Yuan

[divvy]

There is an interesting article on the Seafarer Capital Partners website titled Double invoicing and the Yuan. The author describes a clever method for conducting illegal currency trades and evading taxes. This is an excerpt:

<snip>

Under such constraints, how does a savvy commercial trader move private capital into and out of China, assuming they wish to do so? Export and import trading affords the only sanctioned, large-scale means by which to exchange yuan for other currencies. Trade can thus be used to mask such flows, using the double-invoicing technique. The practice works like this: imagine you are a Chinese citizen, lucky enough to have 5 million yuan in your pocket (about $770,000 at today’s exchange rates). You wish to buy stocks on the NYSE, or a condominium in San Francisco, but you are not allowed to take that much money out of the country for such purposes. However, you can legitimately use capital to buy foreign imports, so you line up a trading partner in Taiwan. She sends you a container of computer chips, and an invoice for the equivalent of 2.5 million yuan. Next, you ask for the regulator’s approval to buy enough foreign currency (New Taiwan dollars) to settle the transaction. However, instead of presenting the original invoice, you present a second, fudged one for the equivalent of 3 million yuan. You receive approval because the regulator doesn’t have the skill to assess the actual market value of your imported goods. You settle the transaction for the equivalent of 2.5 million per the original invoice, and stash offshore the equivalent of 500,000 yuan (or $77,000) in foreign currency.

Next, you take the remaining 2 million yuan (the amount still in your pocket, back home in China), and you set up a factory to process those chips; perhaps you attach them to a circuit board. In doing so, you add the equivalent of 2 million yuan worth of market value to the finished product. The product’s total value is now 4.5 million yuan (2.5 million you paid for the chips, plus 2 million of value you added via your manufacturing process). Next, you apply to export your circuit boards to a U.S.-based computer company. The regulator approves your transaction; however, he warns you to remit your proceeds back to yuan, or you will not be given permission to trade again. You agree to do so, but you submit an alternate invoice for only 3 million yuan – again, the regulator cannot assess the actual market value of your goods. You sell your goods in the U.S. and pocket $693,000 (the equivalent of 4.5 million yuan). You then remit 3 million yuan ($462,000) as promised to the regulator. You have left $231,000 offshore in U.S. dollars. Out of your original 5 million yuan – or $770,000 equivalent – you have funneled out a combined total of $308,000.

<end excerpt>

The author provides some evidence of this activity and roughly estimates the value of it in this (Part 1) article. With the current political wind favoring business, deregulation, and the destruction of governmental oversight, it seems unlikely that this type of larger-scale activity can be effectively prosecuted.

It would be interesting to know the total value of similar strategies and loopholes (including offshore banking tax evasion schemes), and the impact on our deficit. We would likely be in great fiscal shape if we only had the political courage. Our cowardice only makes us complicit in the eventual destruction of our social programs.

Story here: http://seafarercapitalpartners.com/commentary/on-double-invoicing-and-the-yuan-part-1/

[truedelphi]

1. Sounds like the Larry Summers, Tim Geithner, Bernanke,. Paulson

School of "honest economic maneuvers" has been exported to China.

[divvy]

2. I understand the comparison but not sure it is a fair one

The Treasury prints and the Fed buys to influence other interest rates. The rate for home mortgages dipped to a 40 year low. Corporate and municipal bonds followed. The government was able to refinance debt at near-zero debts. After the Bush administration, much of their enormous deficit was financed with short-term bills. The average maturity of ALL outstanding Treasuries was less than 5 years. We inherited a republican debt bomb which needed to be paid at par, or refinanced. After the worst recession on record, refinance was the only option.

The fed had to print money to avoid this liquidity trap. I know there are strong feelings on both sides, but I believe Geithner did the best he could.

So, treasury prints, the fed buys, and rates plummet. Banks back their trucks up to the window and load up with cash at .5%. They buy long term treasuries that yield 3.8% and use 60% to 80% of the balance to secure new loans. The problem is what the banks and businesses did with the cash raised from their loans. Commodities and gold speculation to hedge inflation, de-leveraging or paying off old debt. Not enough new car loans or home refinancing.

The good news is that somewhere in this process, the individual should eventually have more cash. An employed person who refinances a 7% home loan at 4% has more disposable income. Most have been paying off debt. This too will change sometime and the consumer will again start consuming. The hope was that the banks offer the cheap money to others. They didn't. It seems like a scheme, but it is the nature and workings of our capital markets.


"Double invoicing" is a different problem. It is income tax evasion.