Abstract

https://ssrn.com/abstract=2623794
 


 



Carry Trade Dynamics Under Capital Controls: The Case of China


Michelle Zhang


Peking University - HSBC Business School

Christopher Balding


Peking University - HSBC School of Business; ESADE University Faculties - ESADEgeo

June 27, 2015


Abstract:     
Interest rate differentials between China and the rest of the world provide an attractive target for currency carry trade strategies, but remains problematic due to existing capital controls. We focus on copper holdings as an asset used to facilitate the carry trade. Using a unique dataset of copper stock holdings in Shanghai Futures Exchange, we study whether stock are held for carry trade or consumption purposes and how the copper carry trade position, proxied by copper stock value, reacts to the risk-return characteristics. Using an autoregressive distributed lag model, we reach three main conclusions. First, copper trade financing and stock are related to carry trade return, facilitating the Chinese carry trade. Second, copper carry trade positions are related to factors that affect return, including the onshore-offshore interest rate differential and the USD/CNY forward premium. For every 1 basis point increase in the onshore-offshore interest rate differential, copper carry trade positions increase by $1.5 million USD. Third, traders appear unconcerned about risk factors. FX volatility between RMB/USD makes no contribution to the modeling of copper carry trade position, meaning the carry traders are either fully hedged on FX risks, or they are unconcerned about FX risks. The findings imply that potentially lower Chinese interest rates may significantly reduce Chinese demand for copper and traders are profiting from the currency hedge in the form of fixed exchange rates.

Number of Pages in PDF File: 49

Keywords: carry trade, capital controls, copper, commodities

JEL Classification: F31, F32, F34, F37, F38, G15


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Date posted: June 28, 2015  

Suggested Citation

Zhang, Michelle and Balding, Christopher, Carry Trade Dynamics Under Capital Controls: The Case of China (June 27, 2015). Available at SSRN: https://ssrn.com/abstract=2623794 or http://dx.doi.org/10.2139/ssrn.2623794

Contact Information

Michelle Zhang
Peking University - HSBC Business School ( email )
University Town
Shenzhen, 518055
China
Christopher Balding (Contact Author)
Peking University - HSBC School of Business ( email )
University Town
Nanshan District
Shenzhen, Guang Dong 518055
China
ESADE University Faculties - ESADEgeo
Mateo Inurria, 25-27
Madrid, 28036
Spain
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