As China’s foreign currency deposits pass US$1 trillion, banks face unwanted headache, yuan pressure

China’s post-coronavirus export boom has created massive headaches for its commercial banks over how to effectively recycle the huge influx of foreign currencies resulting from overseas sales, and in turn how to generate investment returns, analysts said.

This demand for Chinese assets, in turn, continues to place upwards pressure on the yuan exchange rate, which Beijing is trying to avoid.

Due to the increasing amount of overseas income received by Chinese exporters, China’s foreign exchange deposits hit a historic high of US$1.01 trillion at end of May, up 35.7 per cent from a year earlier, after having surpassed US$1 trillion for the first time in April, according to data from the People’s Bank of China (PBOC).

“We have a lot of dollars sitting on commercial banks’ balance sheets,” said Tommy Xie, head of Greater China research and strategy at OCBC Bank. “This can create a lot of challenges as to how they can make money from that increasing liability.”