Chinese Banks Lure Dollar Deposits with Near-4% Rates, Then Buy Treasuries

Chinese state-owned banks are enticing customers to park their US dollars in accounts offering unusually high rates, up to near-4% for large deposits. Since June, some smaller or foreign banks have been promoting deals as high as 4%, with one deal advertised on social media.

The twist is that these banks aren't converting yuan into dollars themselves due to regulatory scrutiny. Instead, they're luring customer-held dollars onto their balance sheets by offering higher deposit rates, particularly for accounts exceeding $50,000.

Once the banks have dollar deposits, they can use them to buy US Treasuries, which have seen a 10-year yield of 4.76%. This 'asset-liability match' allows the banks to park their money in what appears to be a relatively safe asset while leaving a margin after paying depositors.

The shift could help slow gains in the yuan as it reduces incremental bank demand for dollars, which can push exchange rates up. However, the impact on US Treasury yields is likely limited unless this behavior spreads and grows.