On May 10, the results of a Ministry of Commerce (MOFCOM) investigation into the falsification of export data by 415 textile and clothing exporters from five cities was completed. At least 351 of the businesses had greatly overstated their exports in order to win quota credits next year.
The 415 businesses had been successively reported to MOFCOM during the two weeks between April 9th and 23rd, whereupon MOFCOM immediately followed up with investigations. According to one source involved in the investigations, which were initiated by MOFCOM's Textile Product Quota Auction Committee, these businesses lied about at least 2 billion yuan worth of exports. "Many more have slipped through the net," they told the EO.
The main function of export figures are their use in calculating next years quotas. But this year's Sino-European agreement is about to expire, and the Sino-American has only one year left. This greatly discounts quota values.
According to a source close to MOFCOM's quota auction committee, even deeper investigations have begun.
In 2005, according to Sino-American and Sino-European trade agreements, a portion of China's textile products received restrictions on quantity and kind. The US and Europe are the Chinese textile industry's main markets, and in order to ship there, Chinese businesses must first obtain a license from MOFCOM. According to the business' trade credits, the Ministry will give them a license covering the kinds and quantity of permissible exports-- in effect, quotas. Competition over the quotas stems from this process.
This case of false reporting mainly focuses on Guangdong, Zhejiang, Heilongjiang, Sichuan, and Xinjiang. Businesses working out of these major textile and clothing export regions made fraudulent reports on a massive scale during their most recent quota declarations.
One month ago, businesses that were dissatisfied with the second round of quota bidding notified MOFCOM of false reporting behavior.
Afterwards, the quota auction committee demanded that 415 businesses, before April 27, provide relevant documentation. In the end, 297 of them complied, among which only 64 provided authentic data.
Xungang Jingmao Limited Co. is one business being scrutinized by MOFCOM-- it is suspected of falsifying export data on 2,184 kinds of products. In response to this a spokesman said, "That's nonsense. What proof is there that we've done anything wrong?" The same day, the investigation's final report revealed that MOFCOM had significantly adjusted Xungang's export figures, eliminating 851 kinds of products and reducing the figures for 685.
Of the 415 businesses investigated, the great majority were involved in imports and exports. But in Shenzhen, one-third of the companies were tech companies. One, called Shenzhen City Ludao Technology Limited Co., introduces itself as "a specialist in MP4 production and sales". But these companies simultaneously have quotas on a myriad of products. "We have no idea how companies like this obtained their quota licenses," says one source.
Industry insiders guess that business quotas are linked to the black market. Last September, MOFCOM published "Textile Product Management Methods", which included quota adjustments. According to Wang Qianjin, an analyst for First Textile Network, quota licenses that are in high demand can easily sell for ten times the official price.
"Businesses that don't use up their quotas sell credits to others who are over their own, or to ones who don't have a license to begin with. The government has no clear rules regarding this, which directly allows for the emergence of a black market for quota sharing... Many are just shell companies masquerading as textile businesses, but in reality they are dealers of quota credits."
Export figures are the main deciding factors that go into quota calculations. According to a 2007 second-quarter conference, not a single company didn't use up their 2007 quota for exports to the U.S. and Europe.
Xungang Trade Limited Co. is treating the readjustment of their quota as a normal occurrence. "We've bought quotas before. And we've also sold them," said one spokesman.
Shenzhen Qunkang Industrial Limited Co. is one such company. According to its website, it provides services including "acting as a representative in customs for importers, exporters, and manufacturers. We also provide sourcing licenses and related documents. All export-related procedures are provided by this company, including documentation, inspection, quarantine, customs descriptions, etc." The business even participates in the MOFCOMauction, though it only has rights to seven kinds of quotas. On May 10, one source from the company admitted to the EO, "We've already used them up."
Gao Yong, vice-president of the conference, asks, "If all quota agreements will expire, what's the point of re-selling them?" The Textile Working Conference is currently investigating this issue.
For Gao Yong, recent developments show that the U.S. and Europe won't continue to use the quota regime, but they are even more unlikely to relax controls on their textile imports, and thus will find other policy measures to control Chinese textiles entering their markets. When the quota system is about to expire, businesses won't purely make false claims for the quotas. There are other motives.
Gao Yong reckons that the volume in trade of China's textiles is around 100 billion yuan. The 11th article of the "Textile Product Export Management Law", passed by MOFCOM last September, stipulates that U.S. and European exports occupy 70 percent of China's total exports.
"That's the problem. It's clear that the most important data has to do with exports to the U.S. and Europe," one committee member involved in the investigation tells us. "Even after the quota system expires, the government will still be consulting the export figures. Shrewd businesses realize this."
According to that source, the main motivation for false reporting is preparation for the post-quota era. "Whether or not the quota conference continues, businesses still need licenses, and this is directly tied to performance. Having good performance only has advantages." At the same time, the source says that the basic source for recent falsification is the "Textile Product Export Management Law".
