Finance04 September, 20263 min read
Chinese Banks Buy U.S. Treasuries After Raising Dollar Deposit Rates
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Chinese banks have been purchasing U.S. Treasuries after lifting dollar deposit rates in recent months. Moves to slow yuan gains amid rising U.S. yields.
9 outlets told this the same way.
Dollar deposits to Treasuries
Chinese commercial banks have been buying U.S. Treasuries over the past few months after lifting dollar deposit rates, moves that could help slow gains in the yuan amid a spike in U.S. yields.
Reuters said the purchases have not been previously reported and that it was 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.
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.
After paying the deposit rates of 3% to 4%, banks can earn income from Treasuries, while the 10-year yield has risen more than 30 basis points since the start of June to 4.76%.
A separate banking source told Reuters, "Essentially, domestic yields are too low, so banks need to attract dollar deposits to purchase U.S. Treasuries."
Why the yuan may slow
Reuters reported that there is much more dollar liquidity in China at the moment, with foreign exchange deposits in China standing at $1.18 trillion at end-July, up 17.9% from a year earlier. For the first seven months of the year, Reuters said the deposits grew $121.2 billion, and it linked the higher dollar deposit rates to a shift in what banks and customers find attractive. The Reuters account said the rate for yuan deposits at major state banks is just 0.95%, and that smaller banks started lifting dollar deposit rates in June, forcing larger banks to follow suit or lose out on dollar funding.
Reuters also tied the strategy to signs China is looking to slow down a rise in its currency as the domestic economy struggles, with higher deposit rates at banks able to soak up dollars and prevent the yuan from rising too fast. In Finimize’s framing of the same Reuters dynamic, it described a “tidy” asset-liability match where dollar deposits become dollarbonds, noting that the shift could help slow gains in the yuan even if the purchases are too small to move U.S. yields.
Uncertain scale, market stakes
Reuters said it remains to be seen whether the banks’ recent purchases of U.S. Treasuries will significantly boost China’s overall holdings, and it pointed to data showing Treasuries held by China via U.S. custodians dropped 13% from a year earlier to $633.4 billion in June.
Reuters added that the amount of Treasuries held by China via U.S. custodians was the lowest since September 2008 and less than half of a 2013 peak, while also warning that the data is regarded as imprecise because the ultimate owner can be obscured by custody arrangements in centres such as Luxembourg or the Cayman Islands.
Finimize said Reuters could not confirm the scale, so the direct impact on Treasury yields is probably limited unless the behavior spreads and grows.
CryptoRank’s write-up linked the same broader theme to macro uncertainty, saying mixed signals could pressure risk assets including crypto and DeFi funding and potentially shift capital to safe-haven instruments.
In Reuters’ account of the policy backdrop, it said the yuan has gained nearly 9% on the dollar since the beginning of last year and that, in a move interpreted by markets as a sign the PBOC is concerned about pressure on yields, the central bank surveyed mutual funds regarding long-dated government bond investment last month.