Chinese banks set a record in January, purchasing $50.9 billion in dollars from clients via foreign exchange swaps. This surge, according to official data released Monday, suggests that Chinese exporters are increasingly favoring the dollar as the yield disparity between U.S. and Chinese interest rates widens.
Rather than immediately converting foreign-currency earnings into yuan, exporters are utilizing swaps as a tool to temporarily park earnings in the Chinese currency while hedging their longer-term dollar exposure. These swaps involve exchanging dollars for yuan and then agreeing to reverse the transaction at a future date.
"As the yuan interest rates are much lower compared to the dollar and euro interest rates, Chinese exporters have the incentive to repatriate just enough FX receipts into the yuan for payments while keeping the rest in FX deposits," explained Tommy Wu, senior China economist at Commerzbank.
The move underscores how the rising yield differential between the U.S. and China is influencing the financial strategies of Chinese exporters. This trend gained momentum in January as investors revised their expectations for the timing of U.S. interest rate cuts, pushing the dollar higher.
The shift highlights exporter confidence in the dollar's strength. Even if the Federal Reserve begins cutting rates later this year, analysts anticipate the yield gap to remain significant. As of Monday, the spread between China's 10-year benchmark government bonds and U.S. Treasuries of the same maturity was 185 basis points, significantly wider than the 128 basis points recorded at the end of 2023.
"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," Wu added.
The scale of January's FX swap activity underscores the magnitude of this financial shift, offering a unique window into the strategies of Chinese exporters in this evolving interest rate landscape.
