FDI Mismatch, trade Mis-reporting, and hidden capital Movements: The USA - China case

•We study hidden capital flows using bilater China-US FDI and trade data from 1983 to 2017.•The data indicate sizeable capital inflows and outflows.•Hidden capital inflows respond to financial market conditions and follow outflows with a lag. We analyze the differences between bilateral FDI and trade data reported by the US and by China for the period from 1983 to 2017. Such differences can be interpreted as hidden capital flows. We show that they are economically significant and analyze their dynamics using VAR and ARDL models. We find that hidden capital flows occur in both directions: from China to the US through the trade channel and from the US to China through the FDI channel. Only the latter respond to financial market conditions. In the long run, an increase in hidden capital outflows through the trade channel triggers a hidden capital inflow through the FDI channel.