Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

The only likely movement in the yuan was upward. Put the two together and you had the ingredients for a profitable “carry trade”: borrow in dollars; invest in yuan; repay the dollar loan from the proceeds of the booming Chinese economy at an appreciating yuan exchange rate.6 If China’s exchange regulations made it difficult to import US dollars directly, one or two further steps were added: borrow in dollars; buy commodities; use the expected receipts from the sale of the commodities as collateral to borrow in yuan; invest the yuan in China. Profit could be made three ways: on the spread between Chinese returns and dollar funding costs; on the depreciation of the dollar against the yuan; and on the likely increase in the value of the commodities, driven upward by booming Chinese demand.