By the numbers
Non-financial corporate foreign exchange (FX) deposits hit US$431.7 billion in July, according to central bank data, while a Barclays estimate derived from FX settlement and transaction data put Chinese companies’ total dollar holdings at about US$500 billion.
Goldman Sachs estimates, based on FX conversion ratios, suggest an increase of about US$700 billion in “excess” FX holdings by Chinese firms since 2020.
Why it’s important
Even a partial reversal of such a large position can move the market and momentum is in the yuan’s favour. A six-week rally has wiped out year-to-date losses and blown past chart resistance at 7.1 per dollar. Analysts say that could trigger the conversion of hundreds of billions of dollars to yuan by exporters.
Context
Dollar hoarding was a big factor behind the yuan’s slide through to the end of July, as exporters stood aside and left their receipts in dollars.
The yuan traded at 7.0943 per dollar on Friday, flat for the year and up 2.5% since late July.
Chinese authorities have worked behind the scenes to ensure the currency does not spike abruptly, and some analysts are sceptical that too many businesses will turn yuan buyers while the return on Chinese assets remains relatively low.
Key quotes
“FX conversion ratios are dynamic and sensitive to the dollar index and China’s interest-rate differential with the US,” said Ju Wang, head of Greater China FX & Rates Strategy at BNP Paribas.
“We keep half of our short USD/CNH one-month trade idea, anticipating a cyclical upswing in corporate FX conversion,” Wang said.
“Unless the Fed embarks on an aggressive rate-cutting cycle, we believe Chinese corporates will continue to hold on to dollars, and we estimate a max of US$100-200 billion of the total US$500 billion could be converted if USD/CNH continues to weaken below 7.10,” said Lemon Zhang, FX strategist at Barclays.