{"title":"Interest Arbitrage under Capital Controls: Evidence from Reported Entrepôt Trades","authors":"Jiafei Hu, Haishan Yuan","doi":"10.2139/ssrn.3812284","DOIUrl":null,"url":null,"abstract":"Abstract Capital controls segment the offshore credit market of Chinese renminbi from the onshore market. Using a novel administrative data set, we provide evidence that firms arbitrage the onshore-offshore interest differentials using bank-intermediated “entrepot trades,” which supposedly re-export imports with little or no processing. Onshore-offshore interest differentials drive renminbi inflows from entrepot trades, which strongly predict 1-year-forward outflows to settle bank-issued letters of credit. The patterns and timing of entrepot trade flows are consistent with lending by onshore banks and borrowing from offshore banks through bank-intermediated trade finance. A larger interest differential allows transactions with a lower value to be profitable and induces entry into arbitrages. Our findings suggest that renminbi interest arbitrages are feasible but costly under capital controls.","PeriodicalId":153840,"journal":{"name":"Emerging Markets: Finance eJournal","volume":"40 1","pages":"0"},"PeriodicalIF":0.0000,"publicationDate":"2021-03-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"1","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Emerging Markets: Finance eJournal","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/10.2139/ssrn.3812284","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"","JCRName":"","Score":null,"Total":0}
引用次数: 1
Abstract
Abstract Capital controls segment the offshore credit market of Chinese renminbi from the onshore market. Using a novel administrative data set, we provide evidence that firms arbitrage the onshore-offshore interest differentials using bank-intermediated “entrepot trades,” which supposedly re-export imports with little or no processing. Onshore-offshore interest differentials drive renminbi inflows from entrepot trades, which strongly predict 1-year-forward outflows to settle bank-issued letters of credit. The patterns and timing of entrepot trade flows are consistent with lending by onshore banks and borrowing from offshore banks through bank-intermediated trade finance. A larger interest differential allows transactions with a lower value to be profitable and induces entry into arbitrages. Our findings suggest that renminbi interest arbitrages are feasible but costly under capital controls.