Capital Flight with Intra-firm Lending

Using a novel administrative dataset, we study the cross-border capital flows related to internal loans of Chinese multinational enterprises. We exploit an exogenous policy change on the RMB exchange rate and provide evidence that the expectation of the RMB exchange rate has a significant impact on capital outflows through intra-firm loans. Anticipating RMB depreciation, multinational firms in China increase internal lending to their foreign affiliates. We find that the results are driven by the flows to tax havens and firms that are relatively less active in international trade, which suggests that internal loans of multinationals in China cannot be explained by reallocation of value-adding activities. Instead, our findings suggest that Chinese multinationals use intra-firm lending to facilitate capital flight under capital controls.