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China’s banking sector has begun lowering interest rates on U.S. dollar deposits in response to guidance from the People’s Bank of China (PBOC), a move aimed at curbing dollar hoarding and stabilizing the yuan, sources revealed.
Effort to Reduce Dollar Holdings and Strengthen the Yuan
Retail investors and exporters in China have accumulated nearly $1 trillion in U.S. dollar deposits due to higher U.S. yields and the yuan’s depreciation. Two sources with direct knowledge of the matter confirmed that the PBOC has instructed both major and regional banks to cut dollar deposit rates over the past few weeks.
The measure appears designed to dissuade further growth in dollar deposits and encourage conversion into yuan, aligning with China’s broader strategy to manage capital flows and support its domestic currency.
“We’ve received guidance from regulators to lower dollar deposit rates, and many of our peers have already acted,” one banking source disclosed. The move reflects growing concerns over the increasing proportion of onshore cash held in dollars.
Banks Implement Dollar Deposit Rate Cuts
Some banks have already announced adjustments:
- Bank of East Asia (0023.HK) will lower its one-year dollar deposit rate on amounts above $20,000 to 3.5% from 4.4%, effective in early March.
- Bank of Nanjing (601009.SS) reduced rates for deposits exceeding $3,000 to 2.1% for three-month tenors, down from 4.3% in January.
Although China’s strict capital controls mean onshore dollar deposit rates are generally lower than international rates—where three-month dollar deposits currently yield around 4.5%—they still offer a more attractive return than yuan deposits, which hover around 1% or lower.
Rising Dollar Deposits and Foreign Exchange Demand
China’s foreign exchange deposits reached $892.4 billion in the past month, the highest since April 2023. Household FX deposits rose 18% year-over-year to $146.1 billion, while corporate deposits grew to $451.9 billion, according to PBOC data.
At the same time, commercial banks recorded their highest foreign exchange sales to clients since July, indicating rising demand for foreign currency. The conversion ratio, which measures the willingness of businesses and households to exchange dollars for yuan, dropped to a seven-month low.
The Widening Yield Gap and Yuan Depreciation
The growing disparity between U.S. and Chinese interest rates has weakened the yuan’s attractiveness among domestic investors. The yield gap hit a record high in January, further incentivizing dollar deposits over yuan holdings.
Adding to the pressure, uncertainty over trade policies—including U.S. tariff threats—and a fragile domestic economy have contributed to a 2.2% decline in the yuan since November.
PBOC’s Previous and Current Policy Moves
In 2023, the PBOC directed China’s five largest state-owned banks—Industrial and Commercial Bank of China (ICBC), Bank of China, Agricultural Bank of China, China Construction Bank, and Bank of Communications—to cap dollar deposit rates at 2.8%.
It remains unclear if these banks have received fresh instructions this time. However, a source indicated that the directive now extends beyond major banks, impacting institutions across the sector.
This latest action underscores China’s ongoing efforts to manage foreign exchange liquidity, mitigate currency risks, and reinforce financial stability amid global economic fluctuations.
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