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

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Renliang Liu

University of Guelph

Liugang Sheng

Chinese University of Hong Kong

Jian Wang

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

Date Written: November 11, 2020

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 (November 11, 2020). Available at SSRN: https://ssrn.com/abstract=

Renliang Liu

University of Guelph ( email )

50 Stone Road East
Guelph, Ontario
Canada

Liugang Sheng

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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