Chinese Banks Bid Up US Treasury Demand Amid Dollar Scarcity

Some Chinese commercial banks have raised US dollar deposit rates above 3% in recent months, leading to an increase in purchases of US Treasuries. This is a historical pattern that has played out whenever onshore Chinese dollar funding becomes scarcer than offshore funding.

When this happens, commercial banks bid up dollar deposit rates to retain household and corporate FX balances. They then deploy the proceeds into the most liquid dollar asset available, which is the front and belly of the Treasury curve. The key indicator here is the deposit rate itself, as it signals genuine dollar scarcity rather than a portfolio decision.

The state and joint-stock banks in China have previously shown themselves to be price-insensitive marginal buyers of Treasuries when onshore dollar liabilities rise. This pattern has provided a steady bid at the front end even while official reserve data showed flat or declining foreign holdings, as the purchases run through the commercial banking system rather than the reserve manager.