As China’s foreign currency deposits pass US$1 trillion, banks face unwanted headache, yuan pressure

China’s foreign exchange deposits hit US$1.01 trillion at end of May, up 35.7 per cent from a year earlier, having surpassed US$1 trillion for the first time in April

China is also seeing rising capital inflows from other channels which continues to place unwanted upwards pressure on the yuan exchange rate

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China’s foreign exchange deposits hit a historic high of US$1.01 trillion at end of May, up 35.7 per cent from a year earlier, after having surpassed US$1 trillion for the first time in April, according to data from the People’s Bank of China (PBOC). Photo: AFP

Published: 8:15pm, 5 Jul 2021Updated: 2:12pm, 6 Jul 2021

China’s post-coronavirus export boom has created massive headaches for its commercial banks over how to effectively recycle the huge influx of foreign currencies resulting from overseas sales, and in turn how to generate investment returns, analysts said.

China is also seeing rising capital inflows from other channels, such as foreign direct investment into China’s growing economy, as well as portfolio investment into mainland stocks and bonds.

This demand for Chinese assets, in turn, continues to place upwards pressure on the yuan exchange rate, which Beijing is trying to avoid.

Due to the increasing amount of overseas income received by Chinese exporters, China’s foreign exchange deposits hit a historic high of US$1.01 trillion at end of May, up 35.7 per cent from a year earlier, after having surpassed US$1 trillion for the first time in April, according to data from the People’s Bank of China (PBOC).

We have a lot of dollars sitting on commercial banks’ balance sheets. This can create a lot of challenges as to how they can make money from that increasing liability

Tommy Xie

“We have a lot of dollars sitting on commercial banks’ balance sheets,” said Tommy Xie, head of Greater China research and strategy at OCBC Bank. “This can create a lot of challenges as to how they can make money from that increasing liability.”

Reflecting the limited channels to use foreign currencies in the domestic market, US dollar deposit rates in China have fallen to near all-time lows – levels that are only around a third of the equivalent funding costs in the US itself.

The PBOC is wary that buying US dollar inflows from exporters could result in an accumulation of the currency in its foreign exchange reserves which could draw attention from the US Treasury’s currency manipulation watchdog, said Taimur Baig, chief economist at DBS Bank.

As the US continues to warn countries against intervention in the foreign exchange market, China’s reserves have been stable in a range of between US$3 trillion to US$3.2 trillion since 2017.