Eversince Chinese Govt pushed RMB for internationalization in 2010, Chinese punters started betting on various arbitrage within as well as across border. Chinese just like Indian are very JUGADO JUNTA (people who can work around regulations and can develop Good quick fix solutions for big problems) hence practical implications of regulations may differ from intended ones. Chinese Govt realized this when their Exports to HK differed considerably from actual import figures reported by HK. Difference is due to fake trade happening on account of easy arbitrage across:
- CNH/USD vs CNY/USD swap rates, borrow CNY 600 in mainland which say is equivalent to USD 100.0 in mainland, deposit this with mainland bank and open an LC to HK. In HK, get LC discounted and swap it back to CNH (this will be say 615 CNH) and then remit these funds back to mainland.
- Interest rate arbitrage , borrowing cost in offshore USD is much lower than CNY borrowing cost in mainland
- CNY appreciation - Currency has seen northward movement for long time since currency is still artificially controlled by Chinese Govt.
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