The foreign-currency holdings of Chinese banks have surpassed the USD$1.3 trillion threshold for the first time on record, creating both challenges and opportunities for China’s financial system.
Chinese commercial lenders saw their holdings of foreign exchange rise to $1.38 trillion at the end of May, most of which was held in deposits, according to data released by the People’s Bank of China (PBOC). Foreign currency deposits at Chinese banks increased by over $260 billion in the year though May – for the largest increase since record-keeping commenced in 2002.
PBOC’s foreign reserves also hit a five-year high in the month of May.
This record high in the foreign currency holdings of Chinese banks is primarily the result of a sharp increase in capital inflows driven by strong offshore demand for domestic assets, as well as a robust rise in demand for China’s export goods.
Foreign investors have purchased 1 trillion yuan (approx. USD$154 billion) in Chinese bonds over the past year-long period, with yields still high compared to debt in other major economies that are still grappling with the impacts of the COVID-19 pandemic.
Analysts say the bounty of foreign exchange creates both problems and opportunities for the Chinese financial system by putting upwards pressure beneath the renminbi.
Rates for dollar deposit rates in China have fallen to near record-lows due to the forex inflows, and are currently around just a third of rates available within the US itself.
This adds greater impetus to gains in the renminbi against the dollar, by further pushing Chinese banks to purchase the yuan and make onshore sales of the bounty of greenbacks they’ve accumulated. A stronger renminbi will hurt Chinese exports, while also prompting greater capital inflows from overseas investors.
Analysts say however that this predicament provides China with an excellent opportunity for capital account and forex reforms that will enable domestic investors to acquire more assets offshore.