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Carry Trade Dynamics Under Capital Controls: The Case of China

Author

Listed:
  • Christopher Balding

    (Henry Jackson Society)

  • Andros Gregoriou

    (Liverpool John Moores University)

  • Domenico Tarzia

    (Peking University HSBC Business School)

  • Xiao Zhang

    (Zhongtai Securities)

Abstract

Despite an attractive interest rate differential between China and foreign countries, existing capital control might prevent currency carry trade strategies to be executed. We focus on the copper market to study if trades are taken in order to execute carry trade strategies. We find that copper value is related to carry trade through the onshore-offshore interest differential, while the pegged nature of the USD/CNY exchange rate makes traders indifferent to the forward risk premium. We rule out the possibility of high average payoff due to peso problems, because risk factors are insignificant, implying that carry traders are either fully hedged on FX risks, or they are unconcerned about FX risks.

Suggested Citation

  • Christopher Balding & Andros Gregoriou & Domenico Tarzia & Xiao Zhang, 2024. "Carry Trade Dynamics Under Capital Controls: The Case of China," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 31(4), pages 1065-1085, December.
    • Handle: RePEc:kap:apfinm:v:31:y:2024:i:4:d:10.1007_s10690-023-09441-8
    DOI: 10.1007/s10690-023-09441-8
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    References listed on IDEAS

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    More about this item

    Keywords

    Commodities; Carry trade; Capital controls; Interest rate differential;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls

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