Sept 4 (Reuters) – Chinese banks have been buying U.S. Treasuries over the past few months after lifting dollar deposit rates, according to people familiar with the matter, moves that could help slow gains in the yuan and which come amid a spike in U.S. yields.
The purchases, which have not been previously reported, represent a shift in strategy for Chinese commercial banks. Reuters was, however, not able to ascertain the amounts of money involved or whether they move the needle in terms of China’s overall holdings of U.S. Treasuries.
For many Chinese banks, U.S. Treasuries represent an attractive investment at a time when yields on Chinese government bonds are very low and heavy investment in the domestic bond market has attracted attention from Chinese regulators.
HIKES TO DOLLAR DEPOSIT RATES
Dollar interest rates offered by China’s “Big Five” state-owned lenders on most deposits have been capped at 2.8% since 2023.
But account holders with balances over $50,000 have been able to negotiate rates above 3% since June and even close to 4% at some smaller banks or foreign lenders since August, according to a state banker with direct knowledge of the deals.
Some of the smaller and foreign banks have even sought to woo customers to dollar deposits by advertising on social media.
After paying the deposit rates of 3% to 4%, banks can earn income from Treasuries. The 10-year yield has risen more than 30 basis points since the start of June to 4.76%, on a combination of inflation and U.S. debt worries as well as an improved U.S. growth outlook.
“Essentially, domestic yields are too low, so banks need to attract dollar deposits to purchase U.S. Treasuries,” said a separate banking source, saying lenders had been prodded into action by a “famine” of attractive safe assets to invest in.
The source said, however, that banks were reluctant to convert yuan to dollars themselves given recent regulatory scrutiny of offshore investments.
All sources were not authorised to speak publicly on the subject and declined to be identified.
The People’s Bank of China (PBOC), the country’s central bank, did not immediately respond to Reuters’ faxed requests for comment.
MORE DOLLARS IN CHINA
According to banking sources, there is much more dollar liquidity in China at the moment.
Foreign exchange deposits in China have been rising on the back of booming exports and record trade surpluses. They stood at $1.18 trillion at end-July, up 17.9% from a year earlier and for the first seven months of the year, they grew $121.2 billion, PBOC data showed.
Hikes to dollar deposit rates in China have also meant that keeping money in U.S. dollars, rather than converting it into yuan, has become more attractive. The rate for yuan deposits at major state banks is just 0.95%.
Smaller banks started lifting dollar deposit rates in June, forcing larger banks to follow suit or lose out on dollar funding, said another person familiar with the market.
The move coincides with signs China is looking to slow down a rise in its currency as the domestic economy struggles.
Higher deposit rates at banks can soak up dollars and prevent the yuan from rising too fast, the sources said. Investing cash abroad also relieves some of the downward pressure on domestic yields.
The yuan is one of the strong currencies performing against the dollar, having gained nearly 9% on the dollar since the beginning of last year. And since the Middle East conflict began at the end of February, China’s bond market has been the world’s strongest.
In a move interpreted by markets as a sign that the PBOC is concerned about the pressure on yields, the central bank surveyed mutual funds regarding long-dated government bond investment last month, sources have said.
It remains to be seen whether the banks’ recent purchases of U.S. Treasuries will significantly boost China’s overall holdings.
The amount of Treasuries held by China via U.S. custodians dropped 13% from a year earlier to $633.4 billion in June, the lowest since September 2008 and less than half of a 2013 peak. But the data is regarded as imprecise as the ultimate owner of some holdings can be obscured by custody arrangements in centres such as Luxembourg or the Cayman Islands.
(Reporting by Reuters staff; Editing by Tom Westbrook and Edwina Gibbs)
