Rmb Carry Trade,commodity Carry And Trade Imbalance Of China

The exchange rate system reform began in 2005,and Renminbi start to appreciate afterwards.Considering that there is large interest rate differential between China and the US,the carry traders that hold Renminbi as the investment currency could earn considerable returns,which means that China would face large capital inflows if capital flows unrestricted.In fact,China's foreign exchange reserve has risen steadily during the same period,and it reached 3.99 trillion dollars by June 2014.But capital flows restriction does exist in China,so we need to analyze whether there are other channels of capital inflow.On the other hand,it's interesting to note that the export gap which is equal to the export value from mainland to Hongkong minus Hongkong's import value from mainland began to be positive significantly at the same time of 2005.Is there any connection between the above phenomena? The driving force of capital flows is pursuing excess returns,especially for the “hot money”.Therefore,in order to understand the reality of China deeply,the driving fore,over-invoicing exports and trade surplus must be taken into consideration together.This paper centers around the topic of carry trade under merchandise trade,and first reviews the latest research on carry trade.Based on this,this paper analyzes the relationship between carry trade and trade balance.Furthermore,this paper also investigates the carry trade return of bulk commodity and its influence factor.The specific processes and key findings of this paper can be summarized as follows:First,I investigate the relationship among asymmetric capital controls,carry opportunity and trade imbalance based on a two-country OLG model where there are asymmetric capital controls in one of the countries.The model predicts that if the controls on capital outflows become stricter and interest rates in domestic country are higher than the yields in foreign country,then the consumption of young people in domestic country would decrease and their savings would increase;The country would run a trade surplus if the controls on capital outflows are stricter than the controls on capital inflows and CNY carry opportunity exists as target currency;Regardless of changes of exchange rates and population growth,the agents are in domestic country would consume relatively less than those who are in foreign countries when the interest rates change into higher during the current period from lower than other countries in the last period.Finally,the analysis also implies that the capital market's openness may have the effect of increasing the interest rates if controls on the capital inflows are stricter than on outflows.Secondly,to estimate different effects of the interest rates of China and America on the trade surplus and export gap,monthly data between January 1996 and December2014 has been used.This paper identifies the firms that tend to conduct privy carry trades and the industries that are most likely medium of carry trades through three typical facts about our trade balance and econometric model.The effects of shady carry trade on trade surplus are also researched in this paper.The results show that in recent years,CNY carry trades do exist in the trade surplus form Hongkong and export gap especially during the periods when Renminbi appreciates.To be specific,since 2005 when Renminbi began to appreciate,CNY carry trades where Renminbi as target currency could bring high profits,but they also have high costs because of the capital controls.Therefore,there might be giant capital inflows through privy trades.In addition,the shady carry trades are mostly conducted by foreign-invested companies(especially wholly foreign-owned enterprises)and companies of other type via value-preserving merchandise that could be stored easily.This is reflected by over-invoicing export.While interest rates exert more significant effects on the surplus from companies of other type than the foreign-invested companies(especially wholly foreign-owned enterprises).Finally,if carry trades could be conducted via privy trade of merchandise,then what about commodities' carry trade? How would liquidity and liquidity risk of commodities affect commodities' carry trade? The fifth chapter of this paper examines the relationship of liquidity,liquidity risk and commodities' carry trade return using daily data of 24 commodities during the period of January 1 of 1980 and December31 of 2015 from Bloomberg,where commodities are classified in three categories:metal,energy and agriculture.The effect on commodities' carry trade returns of commodity illiquidity as characteristic is different from the effect of illiquidity risk.The former could be estimated by two means: one is constructing IML portfolio,and the other is measuring the effect of illiquidity on HML portfolio.The results show that illiquidity premium is positive for metal commodities,negative for energy commodities,while it's uncertain for agriculture commodities.As for the effect of illiquidity risk,the risk premium is positive for agriculture commodities,while it tends to be negative for metal commodities.Furthermore,there is convincing evidence of a link between the two effects.The commodities with low liquidity features usually have positive liquidity risk premium,while commodities with high liquidity usually have negative liquidity risk premium.Therefore,the commodities with high liquidity features could be a hedge provider in bad times.