Journal of Banking & Finance Vol. 127 2021
Interest arbitrage under capital controls: Evidence from reported entrepôt trades
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.
- DOI
- 10.1016/j.jbankfin.2021.106129
- Volume
- 127
- Pages
- 106129
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib