China's biggest state banks lifted dollar deposit rates above 3% in June, pulling in enough dollars to fund a fresh wave of US Treasury buying. The trade is funded by customer deposits rather than yuan conversion, which keeps regulators comfortable even as Beijing has previously pushed back on Treasury purchases.
China's biggest state-owned banks have found a way to keep buying US Treasuries without drawing regulatory scrutiny: pay depositors more to hold dollars, then put those dollars into government debt paying a wider spread. Foreign-exchange deposits in China surged to $1.18 trillion by the end of July, a 17.9% jump year-over-year, fed by record trade surpluses that needed a destination.
The deposit rate play
China's Big Five state-owned banks kept dollar deposit rates capped at 2.8% for years, a ceiling in place since 2023. That changed in June, when banks started offering rates above 3% for balances exceeding $50,000. Yuan deposit interest rates at major state banks sit at just 0.95%, so parking dollars at more than three times that rate is an easy call for depositors.
Those deposits created a new problem for the banks: what to do with all those dollars. Domestic safe assets denominated in foreign currency are scarce in China. According to banking sources: "famine" of safe domestic options. That scarcity pushed banks toward the deepest, most liquid bond market on the planet.
Why Treasuries, why now
The 10-year US Treasury yield climbed more than 30 basis points to 4.76% since early June, driven by persistent inflation concerns and a more optimistic US growth outlook. For banks paying just over 3% on dollar deposits, buying Treasuries near 4.8% creates a healthy spread.
Chinese authorities had previously urged banks to limit Treasury purchases amid geopolitical and market tensions, but the current buying has a different character. These purchases are funded by customer dollar deposits, not by converting yuan into dollars. When banks convert yuan to buy foreign assets, it pressures the domestic currency and raises alarms at the People's Bank of China; deploying dollars customers already deposited carries different political optics.
This structure also means the buying doesn't directly weaken the yuan. If anything, giving dollar holders an incentive to keep funds in the banking system rather than moving them offshore helps stabilize onshore dollar liquidity.
A self-reinforcing dynamic
China's trade surplus keeps generating dollar inflows, which makes the pattern self-reinforcing: as long as exporters earn more dollars than the domestic economy can absorb, those dollars need a safe, liquid home, and Treasuries fit the bill. The spread between a 0.95% yuan deposit and a 4.76% Treasury is wide enough that banks have kept buying despite regulatory sensitivities.
Source: Crypto Briefing
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