By Michelle Chen HONG KONG, Feb 6 (Reuters) - The record surge in cross-border yuan trade settlement may be glossing over an uncomfortable truth -- arbitrage fund flows that seem to point to other factors at play.
Arbitrage fund flows have been taking advantage of juicy yields in the onshore market, and the trend is expected to sustain given the chunky gap between the onshore and the offshore yuan market rates.
The strong pickup in trade is partly due to a robust and stable currency, which has led more foreign trading partners to adopt the currency in their trade settlement systems.
Still, market players say there is a murkier side to this.
Bankers say some exporters and importers may have again taken advantage of the different foreign exchange rates of the yuan as well as interest rates in China and Hong Kong to lock in profits via trade channels.
Fake invoices, value-inflated trade and arbitrage fund flows in the disguise of trade transactions were also likely key factors pushing up the yuan trade.
Trade settlement handled by Hong Kong banks increased 78 percent to 469.6 billion yuan ($77.49 billion) in December from a year earlier, its highest since the scheme was launched nearly five years ago, according to the latest statistics from the Hong Kong Monetary authority (HKMA).
Round-tripping remains strong as Hong Kong's re-exports to the mainland, which originated from the mainland, represents nearly 50 percent of the city's total exports to China, ANZ said in a report.
"The round-tripping trade has become an avenue to fuel China's capital inflows. The current accounts could have been improperly used as an alternative way of liquidity injection," said ANZ analysts.
A recent study by research group Global Financial Integrity (GFI) revealed that $400 billion had flowed illicitly into China from Hong Kong via trade misinvoicing between 2006 and the first quarter of 2013.
The suspected arbitrage flows contributed to the heavy capital inflows to the world's second-largest economy, pressuring the Chinese currency higher and challenging the government's efforts to tackle volatile flows.
Fund inflows to China may have then made their way into bonds, stocks and wealth management products which provide more attractive returns than their counterparts in overseas markets.
The HKMA told Reuters it had no comment on the yuan trade figure.
Beijing still keeps a tight leash over its capital accounts and it is difficult for foreign investors to tap onshore markets except by way of some pilot schemes such as Qualified Foreign Institutional Investor (QFII) and Renminbi QFII.