The central bank’s stance marked a shift towards confrontation with a trend that accelerated as the bank, at least publicly, stayed on the sidelines.
Since 2017, the PBOC has largely left the yuan to market forces, keeping its foreign exchange reserves just above the $ 3 trillion mark, while behind the scenes the state bank and private sectors are intervened.
In the 16 months ending in April, dollar deposits increased by $ 242.2 billion, according to PBOC data, an increase equal to about 1.8% in gross domestic product and greater than the much vaunted inflows. in the Chinese bond market, which totaled around $ 220 billion for the period.
Even though the country’s trade surplus swelled during the pandemic and the banking system converted $ 254 billion into yuan for customers, the People’s Bank of China took only $ 90.2 billion from the financial system in the country. during those months.
“The private sector has overtaken the central bank to absorb excess US dollar liquidity generated by companies and inflows of foreign investment,” said HSBC’s global currency strategists, led by Paul Mackel.
It could also reflect the private sector’s view that the yuan is near a peak, or that it is preparing for future payments such as dividends and overseas investment, they added.
The raw economy may explain the build-up: China has the world’s largest current account surplus, and government data shows about half of dollar deposits are held by local businesses that have exploded with demand for their exports.
The same outperformance attracted global capital, which poured into a stock market driven by the pandemic recovery and credit markets paying better returns than other major economies because political parameters began to tighten.
However, these factors hardly guarantee the sustainability of the cash flow, especially since they come up against a formidable development of the dollar / yuan exchange rate, which fell by 11% in one year.
To be sure, many forex traders believe that further lasting declines in the dollar are unlikely. UBS’s Arora and HSBC’s Mackel both believe a dip to 6.25 to the dollar is possible, but a recovery will follow – to around current levels of 6.38 by the end of the year. year for Arora and Mackel to around 6.60 by the end of 2021.
Most also believe that the central bank will not tolerate further gains and cite the jawbone of officials to calm the rally and the decision to cut dollar liquidity, by increasing the banks’ reserve ratio, as proof of its resolve.
Onshore banking sources have said the demand for new dollar loans is terrible, even at extremely low rates – and the data shows the value of deposits revising loans in December.
“The way this has changed over the past few years has been quite phenomenal,” said Patrick Law, head of North Asian local markets and Asia undeliverable futures at Bank of America in Hong. Kong.
“Last year was the first in more than a decade or more that there were more foreign currency deposits than foreign currency loans and that the imbalance increased in 2021,” he said. declared.
The only caveat that keeps people from being too cocky – the currency has been floating for only five years and has only seen such a combination of growth and political settings once before. Still, global investors are keeping a cautious eye.
“The pressure is there, there is no doubt about it,” said Stuart Oakley, head of spot currency trading at Nomura in London. “There are a lot of dollars piling up on the ground.”