Carry Trade Dynamics Under Capital Controls: The Case of China

Christopher Balding, Andros Gregoriou, Domenico Tarzia () and Xiao Zhang
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Christopher Balding: Henry Jackson Society
Andros Gregoriou: Liverpool John Moores University
Domenico Tarzia: Peking University HSBC Business School
Xiao Zhang: Zhongtai Securities

Asia-Pacific Financial Markets, 2024, vol. 31, issue 4, No 11, 1065-1085

Abstract: Abstract Despite an attractive interest rate differential between China and foreign countries, existing capital control might prevent currency carry trade strategies to be executed. We focus on the copper market to study if trades are taken in order to execute carry trade strategies. We find that copper value is related to carry trade through the onshore-offshore interest differential, while the pegged nature of the USD/CNY exchange rate makes traders indifferent to the forward risk premium. We rule out the possibility of high average payoff due to peso problems, because risk factors are insignificant, implying that carry traders are either fully hedged on FX risks, or they are unconcerned about FX risks.

Keywords: Commodities; Carry trade; Capital controls; Interest rate differential (search for similar items in EconPapers)
JEL-codes: F31 F37 F38 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10690-023-09441-8

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