Disguised carry trade and the transmission of global liquidity shocks: Evidence from China’s goods trade data

Shu Lin, Jinchuan Xiao and Haichun Ye

Journal of International Money and Finance, 2020, vol. 104, issue C

Abstract: Currency carry trade disguised as goods trade can potentially channel external financial shocks to domestic economic environment, despite capital controls. We identify this channel in the context of post-GFC China using variations in product characteristics and a policy shock. We show that trade volumes of cost-efficient products responded significantly more to carry returns. However, such differential responses to carry returns vanished after the government’s clampdown on illicit capital flows. At the aggregate level, we demonstrate further that the surge in disguised carry trades led to a significant expansion of China’s shadow banking credit but not its traditional bank lending credit.

Keywords: Carry trade; Goods trade; Global liquidity shock; Capital control; Shadow banking (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:104:y:2020:i:c:s0261560620301364

DOI: 10.1016/j.jimonfin.2020.102180

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