Currency Carry Trade by Trucks: The Curious Case of China's Massive Imports from Itself Xuepeng Liu, Heiwai Tang, Zhi Wang, and Shang-Jin Wei
Review of Finance, Vol. 27, No. 2 (March 2023), pp. 469-493
OVERVIEW
Currency carry trade – a form of risky arbitrage involving borrowing in one currency with a low interest rate and lending in another currency with a higher interest rate – normally takes place in the financial market. In many countries, especially developing countries, however, there are restrictions and even outright bans on cross-border financial transactions. China is one such country with capital controls. Yet, as the incentive for carry trade still exists, some agents may look for other ways, such as trade in goods, to bypass the restrictions. Using detailed trade data reported by both mainland China and Hong Kong, we present evidence that indirect currency carry trade likely takes place via round-trip reimports between mainland China and Hong Kong, through Shenzhen by trucks.
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