Chinese Banks Increase Dollar Purchases Through FX Swaps
Record High Dollar Purchases via FX Swaps
Chinese banks saw a surge in dollar purchases from clients through FX swaps in January, reaching a record high. This trend indicates that exporters are opting to temporarily hold onto dollars rather than converting them to the local currency.
Preference for FX Swaps Over Outright Dollar Selling
In January, Chinese banks’ foreign exchange purchases via swaps hit $50.9 billion, the highest level ever recorded. This shift highlights exporters’ preference for utilizing the swap market to convert their overseas earnings into yuan, seeking better returns on dollars while waiting for favorable exchange rates.
Yield Differentials Influence Decision Making
The widening yield differentials between the US and China in January prompted exporters to engage in FX swaps to acquire yuan temporarily. This strategic move comes as market players anticipate interest rate adjustments in the US, driving up the dollar’s value and influencing corporates’ decisions to hold onto dollars.
Impact of Interest Rate Disparities
With lower yuan interest rates compared to the dollar and euro, Chinese exporters are incentivized to convert a portion of their FX receipts into yuan for payments while retaining the rest in FX deposits. This trend is likely to persist, especially as the interest rates of major currencies remain higher than that of the yuan.
Yield Gap Analysis
The yield gap between China’s 10-year government bonds and US Treasuries stood at 185 basis points in January, up from 128 basis points at the end of the previous year. This disparity underscores the financial dynamics influencing exporters’ currency conversion strategies.
