🔮 Better than the Oracle? Our Fair Value found this +42% bagger 5 months before Buffett bought itRead More

Chinese banks' dollar purchases via swaps from clients hit record high in Jan

Published 02/26/2024, 05:33 AM
Updated 02/26/2024, 05:36 AM
© Reuters. FILE PHOTO: Chinese Yuan and U.S. dollar banknotes are seen in this illustration taken March 10, 2023. REUTERS/Dado Ruvic/Illustration/File Photo

SHANGHAI/SINGAPORE (Reuters) - Chinese banks purchased the most dollars from their clients via FX swaps in January, official data from the FX regulator showed on Monday, suggesting exporters preferred to only temporarily acquire the local currency while holding on to dollars.

Chinese banks' foreign exchange purchases via swaps from their clients hit $50.9 billion in January, the highest level on record, data from the State Administration of Foreign Exchange (SAFE) showed.

The data shows exporters are increasingly turning to the swap market to convert their overseas earnings and remittances into yuan, rather than outright dollar selling, as they seek higher returns on dollars and wait for better exchange rates.

Such a swap implies exporters give the banks their dollars and receive yuan through a contract that reverses the transaction at maturity.

Heightened interest in using the FX swaps to temporarily acquire the yuan comes as yield differentials between the world's two largest economies widened in January, as market participants pushed back on the timing of interest rate cuts in the United States to drive the dollar higher.

And such an expectation increased corporates' willingness to hold on to dollars.

"As the yuan interest rates are much lower compared to the dollar and euro interest rates, Chinese exporters have the incentives to repatriate just enough FX receipts into the yuan for payments while keeping the rest in FX deposits," said Tommy Wu, senior China economist at Commerzbank (ETR:CBKG).

© Reuters. FILE PHOTO: Chinese Yuan and U.S. dollar banknotes are seen in this illustration taken March 10, 2023. REUTERS/Dado Ruvic/Illustration/File Photo

"This trend will likely persist for longer because even after the Federal Reserve and the European Central Bank (ECB) start cutting rates at some point this year, the dollar and euro interest rates will remain much higher than the yuan interest rates."

Yield gap between China's benchmark 10-year government bonds and U.S Treasuries for the same tenor stood at 185 basis points on Monday, up from 128 basis points at the end of 2023.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.