This is not a paywall.

Register for free to continue reading.

The news sucks. But your reading experience doesn't have to. Help us improve that for you by registering for free.

Please create a password or click to receive a login link.

Please enter your password or get a login link if you’ve forgotten

Open Sesame! Thanks for registering.

First Thing, Daily Maverick's flagship newsletter

Join the 230 000 South Africans who read First Thing newsletter.

We write for you

It’s a public service and we refuse to erect a paywall and force you to pay for truth. Instead, we ask (nicely and often) that those of you who can afford to, become a Maverick Insider and help with whatever you can. In order for truth not to become a thing of the past, we need to keep going.

Currently, 18,000 (or less than 0.3%) of our brave and generous readers are members; which says a lot about their characters and commitment to our country. These people are paying for a free service in order to keep it free for everyone.

They are the true South AfriCANs.(Sorry, we couldn’t help ourselves.)

Support Daily Maverick→
Payment options

China Banks Stockpile Record $1 Trillion of Foreign Exc...

Business Maverick

Business Maverick

China Banks Stockpile Record $1 Trillion of Foreign Exchange

Chinese one-hundred yuan banknotes are arranged for a photograph in Hong Kong, China, on Thursday, April 23, 2020. The People's Bank of China (PBOC) has cut short- and medium-term rates recently on top of liquidity injections, loan rollovers and easier regulatory rules. Photographer: Paul Yeung/Bloomberg
By Bloomberg
25 Jun 2021 0

Chinese banks’ stockpile of foreign-currency deposits has surpassed $1 trillion for the first time, creating an opportunity for Beijing to allow greater freedom for capital to flow out of the country.

The pool has been growing as surging demand for Chinese goods during the pandemic has beefed up foreign earnings of exporters, while the resilient economy and strengthening currency have lured overseas investors to sell dollars for yuan to buy Chinese stocks and bonds. Bank deposits in foreign currencies jumped more than $260 billion in the year through May, the most in data starting in 2002.Then a mismatch sets in: despite the increase in inflows, Chinese banks don’t have many channels to utilize their foreign exchange. One way is to sell it onshore, but that adds pressure for the yuan to strengthen. The currency is already trading near a five-year high against a basket of its peers — adding urgency for Beijing to reform its foreign-exchange market and ease capital controls, moves that will act as a pressure-relief valve by letting local investors buy more overseas assets.
Chinese banks' foreign-currency deposits surpassed $1 trillion this year

“Strong capital inflows offer a good window for China to carry out capital-account reforms and relax two-way capital flows,” said Linan Liu, greater China macro strategist at Deutsche Bank AG in Hong Kong. “I expect further relaxation of capital outflows via investment schemes.”

China’s commercial lenders had a record $1.38 trillion of foreign exchange by the end of May, with the majority being held in deposits, according to the People’s Bank of China. Lenders used most of the cash to make loans to firms onshore and overseas, the data showed. The PBOC’s foreign reserves also rose to a five-year high last month.

The accumulation was a result of rapid capital inflows. Overseas investors snapped up 1 trillion yuan ($154 billion) of onshore bonds over the past year, attracted by the relatively high yields on yuan-denominated debt. At the same time, China’s exports surged as its factories returned to operation while the rest of the world was still mired in the pandemic, boosting its trade surplus to a record.

One result of the inflows has been to push down dollar deposit rates in China to near all-time lows — levels that are only about a third of the equivalent funding costs in the U.S. itself. That divergence is motivating banks to buy the yuan versus the dollar, a situation which is worrying Beijing as too strong a yuan may invite hot money inflows and hurt Chinese exporters.

Dollar borrowing costs in China are lower than the rates in the U.S.

The PBOC is already taking steps to reduce dollar liquidity, including easing capital controls put in place following a currency devaluation six years ago. The central bank has increased the quota for investors to buy overseas assets to a record in June, and is expected to establish a trading link for wealth products between the mainland and Hong Kong.

Some officials “may see the foreign-exchange liquidity as a feather in China’s cap, and some may worry that the surge is flighty,” said George Magnus, a research associate at Oxford University’s China Centre. “It’s fine when the flows are coming in, but a big problem for financial stability when they try and go the other way.”

For Magnus, the increase in dollar deposits is “random and most likely temporary,” and will slow when other nations recover from the pandemic.

While it lasts though, the situation offers an opportunity for China to implement reforms and loosen its grip over its tightly controlled capital borders.

“China will take the chance of flush dollar liquidity to make its cross-border flows more balanced,” said Becky Liu, head of China macro strategy at Standard Chartered Plc in Hong Kong. “Policy makers in the coming two to three years will keep widening channels for funds to leave the country.”


Comments - share your knowledge and experience

Please note you must be a Maverick Insider to comment. Sign up here or sign in if you are already an Insider.

Everybody has an opinion but not everyone has the knowledge and the experience to contribute meaningfully to a discussion. That’s what we want from our members. Help us learn with your expertise and insights on articles that we publish. We encourage different, respectful viewpoints to further our understanding of the world. View our comments policy here.

No Comments, yet

Please peer review 3 community comments before your comment can be posted