China's Banks Are Bursting With Dollars, And That's A Worry

China's Banks Are Bursting With Dollars, And That's A Worry

Tue, June 1, 2021   By Winni Zhou and Tom Westbrook

SHANGHAI/SINGAPORE (Reuters) - A mountain of dollars on deposit in China has grown so large that banks are struggling to loan the currency and traders say it poses a risk to official efforts to control a fast-rising yuan. Boosted by surging export receipts and investment flows, the value of foreign cash deposits in China's banks leapt above $1 trillion for the first time in April, official data shows   A previous jump, late in 2017, preceded heavy dollar selling which turbocharged a steep yuan rally in early 2018.

Market participants say the size of the even bigger hoard this time raises that risk, and leaves policymakers' efforts to restrain the yuan vulnerable to the whims of the exporters and foreign investors who own the cash.

"This positioning in particular, in our view, is susceptible to a capitulation if the broad dollar downtrend were to continue," said UBS' Asia currency strategist Rohit Arora, especially if the yuan gains past 6.25 or 6.2 per dollar.

"We think a break of these levels ... has the ability to affect market psyche," he said, since they represent, roughly, the yuan's 2018 peak and its top before a devaluation in 2015, and trigger selling from local corporations in particular.

The heavily managed yuan is at three-year highs, having rallied through major resistance at 6.4 per dollar, and it clocked its best month since November in May.

Concerned this rapid rise could unleash huge conversion of the deposits into yuan, the People's Bank of China (PBOC) said on Monday that from mid-June, banks must set aside more reserves against them to discourage further accumulation.

STATE RESTRAINT

The central bank's stance marked a shift towards confronting a trend that gathered steam while the bank had, publicly at least, kept to the sidelines. Since 2017, the PBOC has largely left the yuan to market forces, keeping its currency reserves just above the $3 trillion mark, while behind the scenes the state-bank and private sectors stepped in.

Over the 16 months to April, dollar deposits rose by $242.2 billion, PBOC data shows, a rise equal to about 1.8% of gross domestic product and bigger than the much-vaunted inflows into China's bond market, which totalled about $220 billion for the period.

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