Chinese Banks Increase Dollar Purchases via FX Swaps in January
Chinese Banks Favor FX Swaps Over Outright Dollar Selling
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 for temporary local currency acquisition while holding onto their dollars.
Record High Foreign Exchange Purchases via Swaps
In January, Chinese banks recorded foreign exchange purchases of $50.9 billion through swaps, marking the highest level to date. Data from the State Administration of Foreign Exchange (SAFE) highlights the shift towards using the swap market for converting overseas earnings into yuan.
Exporters Seek Higher Returns on Dollars
Exporters are increasingly utilizing FX swaps to convert their earnings into yuan, rather than selling dollars outright. This strategy allows them to capitalize on higher returns on dollars and wait for favorable exchange rates.
Yuan Interest Rates Influence Decision Making
The interest rate differentials between the US and China have prompted Chinese exporters to retain their dollars. With expectations of rate cuts in the US, exporters find it beneficial to keep their earnings in FX deposits due to the higher interest rates on dollars and euros.
Yield Gap Widens Between China and US
The yield gap between China’s 10-year government bonds and US Treasuries has widened to 185 basis points, up from 128 basis points at the end of 2023. This disparity further motivates corporates to hold onto their dollar reserves.
Chinese exporters are adapting their strategies amidst changing interest rates and currency dynamics. The shift towards FX swaps reflects a nuanced approach to managing foreign exchange earnings and maximizing returns in a volatile market.
