Faking Trade for Capital Control Evasion: Evidence from Dual Exchange Rate Arbitrage in China

62 Pages Posted: 9 Mar 2021

See all articles by Renliang Liu

Renliang Liu

Liaoning University

Liugang Sheng

The Chinese University of Hong Kong

Jian Wang

The Chinese University of Hong Kong, Shenzhen; Shenzhen Finance Institute

Date Written: January 9, 2021

Abstract

Using a unique institutional setting of dual exchange rates of Chinese currency, this paper provides novel evidence that firms manipulate trade data to evade capital controls. We develop a model showing that the trade data over-reporting is positively (negatively) correlated with the exchange rate spread when the spread is positive (negative), and such correlations are more pronounced for products with low risks of being caught. Empirical results from threshold regressions using time series data and Benford's law using firm-product trade data between mainland China and Hong Kong support the theoretical predictions of dual exchange-rate arbitrage camouflaged under the trade account.

Keywords: Capital controls, dual exchange rates, missing trade, Benford's law

JEL Classification: F31, F38, F14, G14, G15, G28

Suggested Citation

Liu, Renliang and Sheng, Liugang and Wang, Jian, Faking Trade for Capital Control Evasion: Evidence from Dual Exchange Rate Arbitrage in China (January 9, 2021). Available at SSRN: https://ssrn.com/abstract=3728855

Renliang Liu

Liaoning University ( email )

Shenyang, Liaoning
China

Liugang Sheng

The Chinese University of Hong Kong ( email )

Shatin, N.T.
Hong Kong
Hong Kong

Jian Wang (Contact Author)

The Chinese University of Hong Kong, Shenzhen ( email )

HOME PAGE: http://jianwang.weebly.com

Shenzhen Finance Institute ( email )

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