In January, official data from the FX regulator revealed that Chinese banks recorded the highest-ever level of purchasing dollars from their clients through FX swaps, reaching $50.9 billion. This trend suggests that exporters in China are opting for temporary acquisition of the local currency while holding onto dollars.
The data from the State Administration of Foreign Exchange (SAFE) indicates a shift among exporters towards using the swap market to convert their overseas earnings and remittances into yuan, rather than engaging in outright dollar selling. This strategic move allows them to seek higher returns on dollars and wait for more favorable exchange rates.
The FX swap process involves exporters providing their dollars to banks and receiving yuan through a contractual arrangement that reverses the transaction at maturity.
This increased interest in FX swaps aligns with the widening yield differentials between the world’s two largest economies in January. Market participants, adjusting expectations for the timing of interest rate cuts in the United States, contributed to a stronger dollar. Consequently, Chinese corporates have shown a growing inclination to retain dollars.
Tommy Wu, senior China economist at Commerzbank, explained, “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.” He predicts this trend will endure, especially as the interest rate differentials between the dollar, euro, and yuan persist.
The yield gap between China’s benchmark 10-year government bonds and U.S. Treasuries with the same maturity stood at 185 basis points on Monday, up from 128 basis points at the end of 2023.
