Sheng Liugang | Faking Trade for Capital Control Evasion: Evidence from Dual Exchange Rate Arbitrage

Recently, the 2021 "International Trade Disputes and Globalization Restructuring Academic Symposium" was successfully held online.Sheng Liugang, Associate Professor, Department of Economics, Chinese University of Hong KongAttendInternational Finance Thematic Sub-Forum 4And shared with his collaborators (see below) a piece titled "False trade and capital control circumvention: Evidence from RMB dual exchange rate arbitrage》Faking Trade for Capital Control Evasion Evidence from Dual Exchange Rate Arbitrage in ChinaThe article.

Article author

Professor Sheng Liugang is an Associate Professor in the Department of Economics at the Chinese University of Hong Kong, Deputy Director of the Economic Research Centre at the Hong Kong Institute of Asia-Pacific Studies, Director of the Trade and Development Program, holds a PhD in Economics from the University of California, Davis, a Master of Economics from the National School of Development at Peking University, and a Bachelor of Laws from the School of Government. Professor Sheng's main research areas include international trade, international finance, and development economics. He has published academic papers in numerous top-tier domestic and international journals, including...Quarterly Journal of Economics, Journal of Development Economics, Journal of Applied Econometrics，Journal of Economic Behavior and OrganizationEconomics Quarterly, Law and Social Sciences. Professor Sheng also frequently publishes current affairs commentary articles in the Financial Times, Hong Kong Economic Journal, Tsinghua Financial Review, VoxChina, and other publications. His current research focuses on the Sino-US economic and trade conflict, and he has published the book "The Changing Landscape of Sino-US Economic and Trade Relations." He has lectured on Sino-US economic and trade frictions at forums such as the Shanghai Forum, Beijing Forum, the Shenzhen Institute of Advanced Finance Lecture Series, and the Shenzhen Financial Leading Talents Training Program.
 

Sheng Liugang

Articles by Professor Sheng Liugang and his collaboratorsThis study examines the dual exchange rate mechanism of the RMB to demonstrate that companies can engage in foreign exchange arbitrage by falsifying international trade data. The larger the exchange rate difference between the two foreign exchange markets, the greater the likelihood of companies falsifying data. Firstly, the paper uses a theoretical model to analyze that companies may participate in foreign exchange arbitrage by falsifying financial data or exaggerating trade amounts. The larger the exchange rate difference between the two countries, the more motivated companies are to falsify financial data, and this behavior is more pronounced in low-risk products. Furthermore, this paper uses time series and cross-sectional analysis models, employing trade data between mainland China and Hong Kong, to verify the validity of the dual exchange rate arbitrage mechanism theory under the international trade assumption. The findings of this paper highlight the potential difficulties of capital control and also have a positive effect on improving policy efficiency.

  (Translated from a paper abstract provided by the guest)

Wang Yongqin

Wang Yongqin, Professor of Economics, Fudan UniversityProfessor Wang offered two points of commentary on the article: First, he pointed out that the core idea of ​​the article is to verify that companies can achieve arbitrage transactions by overstating trade amounts. The article's theoretical research includes two aspects: the larger the interest rate differential between the two foreign exchange markets, the higher the amount of financial overstatement by the company; and the higher the likelihood of being caught. The article's empirical research uses time series models and cross-exchange models to support the theoretical points mentioned above. Subsequently, Professor Wang gave two evaluations of the article: 1. The article does not explore and study corporate tax avoidance behavior in depth, and the article could also add some tax rate-related control factors; 2. Professor Wang pointed out that the article uses covered interest rate parity theory to consider the impact of capital flight, but the author could further consider the reasons for the control of covered interest rate parity theory; and the covered interest rate control factor is not clearly set.