Key facts
- Chinese banks are purchasing U.S. Treasuries after increasing dollar deposit rates.
- Account holders with balances over $50,000 can negotiate dollar deposit rates above 3%, nearing 4% at some smaller banks.
- The 10-year U.S. Treasury yield has risen to 4.76%, making it an attractive investment compared to low Chinese government bond yields.
- Foreign exchange deposits in China reached $1.18 trillion at the end of July, up 17.9% year-on-year.
- The yuan has gained nearly 9% against the dollar since the start of last year.
Chinese banks have been actively purchasing U.S. Treasuries in recent months, a strategy shift driven by higher dollar deposit rates and the allure of attractive yields compared to the low returns on domestic Chinese bonds. This move comes as U.S. Treasury yields have spiked, with the 10-year yield reaching 4.76%.
Banks are reportedly offering negotiated dollar deposit rates above 3%, and even close to 4% at some smaller or foreign lenders, to attract funds. These deposits are then invested in U.S. Treasuries, providing a more profitable avenue than domestic investments which have also attracted regulatory attention. The increased dollar liquidity in China, fueled by strong exports and trade surpluses, further supports this strategy.
This trend of higher dollar deposit rates and subsequent Treasury purchases could help to slow the appreciation of the yuan, which has gained significantly against the dollar. The People's Bank of China has also shown concern over domestic yields, having surveyed mutual funds on long-dated government bond investments. While China's official holdings of U.S. Treasuries have decreased, the ultimate ownership of some assets may be obscured by offshore custody arrangements.