China's Banks Hoard US Debt to Stem Yuan Gains

Chinese banks have been buying US Treasuries over the past few months as they attempt to slow down the yuan's gains. According to people familiar with the matter, this shift in strategy follows an increase in dollar deposit rates.

The rate for yuan deposits at major state banks is only 0.95%, making it attractive to keep money in US dollars instead of converting it into yuan. Smaller banks started lifting dollar deposit rates in June, forcing larger banks to follow suit or risk losing out on dollar funding.

The move coincides with signs that China is looking to slow down a rise in its currency as the domestic economy struggles. Higher deposit rates at banks can soak up dollars and prevent the yuan from rising too fast. By investing cash abroad, Chinese banks also relieve some of the downward pressure on domestic yields.

Despite this, it remains to be seen whether the banks' recent purchases of US Treasuries will significantly boost China's overall holdings. The amount of Treasuries held by China via US custodians dropped 13% from a year earlier to $633.4 billion in June, its lowest since September 2008.