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Interest arbitrage under capital controls: Evidence from reported entrepôt trades

Jiafei Hu and Haishan Yuan

Journal of Banking & Finance, 2021, vol. 127, issue C

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 “entrepôt trades,” which supposedly re-export imports with little or no processing. Onshore-offshore interest differentials drive renminbi inflows from entrepôt trades, which strongly predict 1-year-forward outflows to settle bank-issued letters of credit. The patterns and timing of entrepôt 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.

Keywords: Capital controls; RMB Interest arbitrage; Entrepôt trade; Trade finance (search for similar items in EconPapers)
JEL-codes: F23 F33 G12 G15 G18 O24 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:127:y:2021:i:c:s037842662100087x

DOI: 10.1016/j.jbankfin.2021.106129

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