Chinese banks bought a record amount of dollars by exchanging currencies

Banks in China have increased their purchases of dollars through currency exchange or swaps from buyers. Last January they bought the highest dollar amount ever in this process. This means that the exporters only want to buy the Chinese currency yuan for a temporary period, i.e. they want to hold the dollar.

According to news agency Reuters, Chinese banks bought 5,900 million dollars from their customers through currency exchange in January. They have not bought so many dollars in any month since record keeping began.

The data shows that China's exporters are now increasingly turning to currency exchanges to convert overseas earnings or repatriate earnings into yuan. They are walking this path without directly selling dollars. Because, by selling dollars, they want to earn more and for that, they decide to exchange currency after seeing the fluctuation of dollar price.

This type of currency exchange means that the exporters deposit dollars with the bank for a certain period of time and receive dollars by depositing yuan at the end of the period.

Interest rate differentials between China and US bonds widened in January; That is why exporters are now more interested in currency exchange. This is related to the decision of the Federal Reserve, the central bank of the United States. That is, when they have made it clear that the policy interest rate is not going to be cut anytime soon, it has started to have a multi-faceted effect on the market.Corporates are keen to hold onto the dollar on the assumption that policy interest rates will not fall. Investors are also getting interested in US bonds.

With yuan-denominated interest rates lower than those on dollar-denominated bonds, Chinese exporters are now exchanging only as much dollars as they need for yuan and keeping the rest, said Tommy Wu, debt economist at Commerce Bank.

Tommy also said that even if the Federal Reserve and the European Central Bank begin to cut interest rates later this year, this trend will continue. Because the interest rate on dollar and euro based bonds will be higher than the interest rate on yuan based bonds.

On Monday, the interest rate gap between China's 10-year government bond and the same-term US Treasury bond was 185 basis points; It was 128 basis points at the end of 2023.