Chinese commercial banks have been buying US government bonds over the past few months after raising dollar deposit rates to attract customer funds, amid low yields on Chinese government bonds. This move could help slow the appreciation of the yuan, sources said, noting it represents a shift in strategy for Chinese banks, though the scale of purchases could not be determined and it remains unclear whether it is large enough to affect China's overall holdings of US Treasuries. Since June, customers with deposits exceeding $50,000 have been able to negotiate rates above 3%, while some smaller and foreign banks have offered rates near 4% since August. Even with deposit rates of 3-4%, banks can still generate a positive spread by investing in US Treasuries, as the yield on 10-year US Treasuries has risen more than 0.30 percentage points since early June to 4.76%. Data from the People's Bank of China show that foreign currency deposits in China stood at $1.18 trillion at the end of July, up 17.9% year-on-year, and increased by a total of $121.2 billion in the first seven months of the year. The higher dollar deposit rates also make holding dollars more attractive than converting back to yuan, with yuan deposit rates at major state-owned banks at just 0.95%. The banks' moves come amid signs that Chinese authorities want to slow the yuan's appreciation, as the domestic economy faces pressure. The yuan has strengthened nearly 9% since the beginning of last year. Meanwhile, US Treasuries held by China through US custodians fell 13% year-on-year to $633.4 billion in June, the lowest level since September 2008 and less than half the peak reached in 2013. However, these figures may not reflect the full picture, as some bonds may be held through domestic or other financial center custodians, such as Luxembourg and the Cayman Islands.
Chinese banks' dollar deposit rate hikes and US Treasury purchases aim to slow yuan appreciation, strengthening USD vs CNY.
Chinese banks buying US Treasuries adds demand, supporting higher yields; article notes 10-year yield rose to 4.76%.
