Currency Carry Trade by Trucks: The Curious Case of China’s Massive Imports from Itself
Xuepeng Liu, Heiwai Tang, Zhi Wang, Shang-Jin Wei
Review of Finance, Volume 27, Issue 2, March 2023, Pages 469–493, https://doi.org/10.1093/rof/rfac015
Capital controls are common in many developing countries. With capital controls, the standard financial market transactions needed for currency carry trade are hard to implement. Yet, as long as there is a big difference between domestic and foreign interest rates, the incentive to engage in currency carry trade is present. Using detailed trade data reported by both the mainland Chinese and Hong Kong’s governments, we present evidence that indirect currency carry trade likely takes place via round-trip reimports. We find that reimport activities are heavier when the return to currency carry trade is stronger, especially for products with a high value to weight ratio. We also show that greater state control in terms of more state-owned firms does not reduce such “carry trade by trucks.”