Macro
Chinese Banks Increase US Treasury Purchases Amid Rising Dollar Deposits
China’s largest banks are adopting a strategic approach to manage dollar deposits by offering competitive interest rates, which has led to a significant increase in their purchases of US Treasuries. This shift is a response to a surge in foreign-exchange deposits, which reached $1.18 trillion by the end of July, marking a 17.9% year-over-year increase.
Historically, China’s Big Five state-owned banks maintained a capped dollar deposit rate of 2.8%. However, since June, they have begun offering rates exceeding 3% for deposits over $50,000, making dollar deposits more attractive compared to yuan deposits, which yield only 0.95%.
With a growing influx of dollars from trade surpluses, these banks face a challenge in finding safe domestic assets. As a result, they are increasingly turning to US Treasuries, which currently offer yields above 4.7%. The 10-year Treasury yield has recently climbed to around 4.76%, creating a favorable spread for banks holding dollar deposits.
Notably, this recent wave of Treasury purchases is funded by customer dollar deposits rather than converting yuan to dollars, which alleviates potential downward pressure on the yuan and aligns with regulatory preferences. This dynamic is further reinforced by China’s ongoing trade surplus, ensuring a steady inflow of dollars that need secure investment options.
FAQ
Why are Chinese banks increasing their purchases of US Treasuries?
Chinese banks are increasing their purchases of US Treasuries to manage a significant rise in dollar deposits, which have surged due to trade surpluses. Offering competitive interest rates on dollar deposits has made Treasuries an attractive investment option.
What interest rates are Chinese banks offering on dollar deposits?
Chinese banks have begun offering interest rates exceeding 3% for dollar deposits over $50,000, compared to only 0.95% for yuan deposits, making dollar deposits more appealing.
How much did China’s foreign-exchange deposits increase by in July?
By the end of July, China’s foreign-exchange deposits reached $1.18 trillion, marking a 17.9% year-over-year increase.
What is the current yield on 10-year US Treasuries?
The current yield on 10-year US Treasuries has climbed to around 4.76%, providing a favorable investment opportunity for banks holding dollar deposits.
How does the increase in Treasury purchases affect the yuan?
The increase in Treasury purchases is funded by customer dollar deposits rather than converting yuan to dollars, which helps alleviate potential downward pressure on the yuan and aligns with regulatory preferences.