Chinese banks accumulate record $ 1 trillion in foreign exchange
The stock of foreign currency deposits of Chinese banks exceeded $ 1 trillion for the first time, creating an opportunity for Beijing to liberalize the country’s capital account.
China’s resilient economy and stronger currency have attracted record foreign purchases of bonds and stocks over the past year, while the surge in demand for the goods needed to overcome the pandemic has meant that the exporters brought in more dollars. Bank stocks jumped by more than $ 260 billion in the 12 months to May, the highest of any comparable period dating back to 2002.
The pace of the influx has tested authorities’ tolerance for a stronger yuan, with the currency now close to a five-year high against a basket of its peers. The appreciation adds to the urgency for Beijing to reform its foreign exchange market and ease capital controls, measures that will help reduce the liquidity of the dollar, limit currency gains and lead to a more financial market. liberalized.
“Strong capital inflows provide a good window for China to carry out capital account reforms and ease two-way capital flows,” Linan Liu, Greater China Macro-Strategy Officer at Deutsche Bank AG, said in Hong Kong. “I expect further easing of capital outflows through investment schemes. “
Chinese commercial lenders were holding a record $ 1.38 trillion in foreign currency at the end of May, with the majority held in deposits, according to the People’s Bank of China. Lenders have used most of the cash to make loans to local and foreign businesses, the data shows. The PBOC’s foreign exchange reserves also hit a five-year high last month.
The accumulation was the result of rapid inflows of capital. Foreign investors have bought 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 resumed operations while the rest of the world was still mired in the pandemic, taking its trade surplus to a record.
One of the results of these inflows has been to push dollar deposit rates in China down to levels almost never reached – levels that are only about a third of the equivalent financing costs in the United States itself. . This divergence prompts traders to buy the yuan against the dollar, a situation that worries Beijing because too strong a yuan can invite speculative capital inflows and harm Chinese exporters.
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 increased the quota for investors to buy assets abroad to a record high in June, and is expected to establish a trade link for wealth products between the mainland and Hong Kong.
Some officials “may see foreign currency liquidity as a feather in China’s hat, and some may worry that the rise is fickle,” said George Magnus, associate researcher at the University of China Center. ‘Oxford. “It’s good when the flows come in, but it’s a big deal for financial stability when they try to go the other way.”
For Magnus, the increase in dollar deposits is “random and most likely temporary” and will slow down as other countries recover from the pandemic.
As long as it continues, the situation offers an opportunity for China to implement reforms and loosen its grip on its tightly controlled capital borders.
“China will seize the chance to have dollar liquidity to balance its cross-border flows,” said Becky Liu, head of macro strategy for China at Standard Chartered Plc in Hong Kong. “Policymakers over the next two to three years will continue to expand the channels for funds to leave the country.”
– With the help of Tian Chen, Qizi Sun and Sofia Horta e Costa