the arbitrage is not that efficient between East and West- it was only a couple of weeks ago that there was $50 difference between Huobi and Bitstamp, Chinese BTC being at the premium,
I don't know much about arbitrage (the players seem to be a rather discrete bunch). This is what I can infer and guess:
Arbitragers are racing against each other. As soon as they see an arbitrage opportunity -- an "ask" at one exchange that is significantly lower than a "bid" at the other -- they must quickly execute the trades, before some competitor does it and destroys the opportunity.
Typical delays seem to be tens of seconds or less. There is not enough time to actually send the coins from one exchange to the other, not to mention fiat. So arbitragers must keep fiat and BTC balances in both exchanges.
While the price is wandering randomly, the trades tend to go both ways, so the accounts only need occasional adjustments. When there is a big rally pulled by one of the two exchanges, however, the trades will happen mostly in one direction, so the arbitrager may run out of reserves.
For example, if Huobi is leading a rally and Bitstamp is lagging, the arbitrager keeps buying BTC with dollars at Bitstamp and selling BTC for yuan at Huobi -- until he runs out of dollars at Bitstamp, or of BTC at Huobi. In the first case he must withdraw the yuan, convert them to dollars, and deposit the dollars at Bitstamp. In the second case, he must withdraw BTC from Bitstamp and deposit them at Huobi.
In the first case, he is out of the game for a couple of days (unless he has some faster channel to convert the currencies). In the second case he will be out for an hour or more, including the 20 minutes for the two blockchain transactions and maybe another 30 minutes for extra confirmation of the deposit. (Someone who claimed to be an arbitrager said that he used litecoins to transfer bitcoins between exchanges, because of the much faster block time.) If all arbitragers between the two exchanges run out of funds, the price difference will start to grow, until they can top up the accounts.
Effective arbitrage also requires fast access to the order books at the two places. For that reason, I suspect that the main arbitragers (at least between the Chinese exchanges) are the exchange owners themselves, or certain privileged clients. The owner can see the order book several seconds before anyone else. If the two exchange owners cooperate, they can beat any independent arbitrager. (Unlike stock exchanges, nothing prevents owners of bitcoin exchanges from trading at their own shops, for front-running or arbitraging.)
it has been said that the diametrically opposite position (re. China/BTC) is the one being held by the Chinese than the one you have posited - that is, they are prepared to take a loss in Yuan just so as to be able to convert to USD and so shift "value" out of China.
Could be. Whether a price situation is an arbitrage opportunity depends not only on the currency exchange rates, but also on the cost of currency conversion and transmission, and on factors that affect the effective value of each currency to the arbitrager, like the one you mention.
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