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

Speaker：Liugang Sheng, Chinese University of Hong Kong

Time: Nov.5, 13:30 – 15:00 (Beijing Time)

About the speaker:

Professor Sheng Liugang is an Associate Professor of the Department of Economics in the Chinese University of Hong Kong. He is also the associate director of the Economic Research Centre and the director of the Trade and Development Programme in the Hong Kong Institute of Asia-Pacific Studies. Prof. Sheng’s research interests cover international trade, international macroeconomics, and economic development. His papers have been published in many reputable international and Chinese journals including Quarterly Journal of Economics, Journal of Development Economics, Journal of Applied Econometrics, Journal of Economic Behavior and Organization, China Economic Quarterly, and Law and Social Sciences.  He also published a book titled with “Changes in the China-US Economic Relations: Challenges and Strategies”.

Abstract：

Using a unique institutional setting of dual exchange rates in China, this paper provides novel evidence that firms manipulate international trade data to evade capital controls for foreign exchange arbitrage. We develop a model showing that trade data overreporting is positively (negatively) correlated with the exchange rate spread when the spread is positive (negative) if firms fake trade data to engage in foreign exchange arbitrage, and such correlations are more pronounced for products with a low risk of being detected. Empirical results from threshold regressions using the aggregate time series data and Benford’s law using the disaggregated firm-product trade data between the Chinese Mainland and Hong Kong support the theoretical predictions of dual exchange rate arbitrage camouflaged under international trade. Our results highlight the challenges to implementing capital controls and may help improve the effectiveness of such policies.

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