Chinese banks are accumulating dollar deposits to invest in U.S. Treasuries. With a surge in dollar liquidity due to strong Chinese exports, U.S. Treasuries, which offer relatively high yields, have become an attractive investment for these banks.
According to Reuters, China's five major state-owned banks have been offering interest rates of 2.8% on dollar deposits since 2023, but some banks began exceeding 3% in June. Smaller banks and foreign banks have recently offered rates approaching 4% to attract dollar deposits.
This trend follows a record trade surplus driven by robust Chinese exports, leading to a significant increase in dollar deposits within the country. The People's Bank of China reported that foreign currency deposits reached $1.18 trillion by the end of July, a 17.9% increase from the previous year. In the first seven months of this year, deposits rose by $121.2 billion.
Banks are investing these dollar deposits in U.S. Treasuries. Recently, the yield on 10-year U.S. Treasuries has risen over 30 basis points since early June, reaching 4.76%, due to concerns about inflation and U.S. fiscal policy, as well as improved economic growth prospects. For Chinese banks, this presents an opportunity to earn interest income from relatively high-yielding U.S. Treasuries.
This strategy may also help ease the strengthening of the yuan against the dollar. By attracting dollar deposits, banks can reduce the amount of dollars converted to yuan by businesses and individuals. The yuan has been appreciating against the dollar, rising about 9% since early last year. A rapid appreciation of the yuan could pose challenges for the struggling Chinese economy.
Additionally, investing dollars in U.S. Treasuries may help alleviate downward pressure on Chinese bond yields by diversifying funds that would otherwise flow into the domestic bond market.
However, Reuters noted that it remains unclear how much the recent purchases of U.S. Treasuries by Chinese banks will increase China's overall holdings. According to the U.S. Treasury, China's holdings of U.S. Treasuries stood at $633.4 billion as of June, a 13% decrease from the previous year. This is the lowest level since September 2008 and less than half of the peak in 2013.
* This article has been translated by AI.
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