Chinese exporters have accumulated a U.S. dollar reserve of roughly $500 billion. Analysts say this could further boost the yuan, if they begin purchasing the Chinese currency.
BY THE NUMBERS
In July, the non-financial corporate foreign exchange(FX) deposits hit $431.7 billion as per the central bank data. However, Barclays’ estimate derived from FX settlement and transaction data put Chinese companies’ total dollar holdings at much more, around $500 billion.
Goldman Sachs estimates have suggested an increase of $700 billion in “excess” FX holdings by Chinese firms since 2020. These estimates are based on FX conversion ratios.
WHY IT’S IMPORTANT
Even a partial reversal of such a large position can move the market and momentum is in the yuan’s favour.
A six-week rally has wiped out year-to-date losses and blown past chart resistance at 7.1 per dollar. Analysts say that could trigger the conversion of hundreds of billions of dollars to yuan by exporters.
CONTEXT
Until July end, dollar hoarding was a big factor behind yuan’s slide. This is because exporters stood aside and left their receipts in dollars.
The yuan traded at 7.0943 per dollar on Friday, flat for the year and up 2.5% since late July.
Chinese authorities have quietly worked to prevent a sharp spike in the currency. Analysts doubt many businesses will buy yuan due to low returns on Chinese assets.
“FX conversion ratios are dynamic and sensitive to the dollar index and China’s interest-rate differential with the U.S.,” said Ju Wang, head of Greater China FX at BNP Paribas.
“We keep half of our short USD/CNH one-month trade idea, anticipating a cyclical upswing in corporate FX conversion,” Wang said.
“Unless the Fed embarks on an aggressive rate-cutting cycle, we believe Chinese corporates will continue to hold on to dollars. We estimate a max of $100-200 billion of the total $500 billion could be converted if USD/CNH continues to weaken below 7.10,” said Lemon Zhang, FX strategist at Barclays.
