Chinese Banks Ramp Up US Treasury Purchases After Boosting Dollar Deposit Rates

Chinese commercial banks have been increasing purchases of US Treasuries in recent months after raising interest rates on dollar deposits, according to people familiar with the matter. The move marks a notable shift in strategy as banks seek more attractive returns amid persistently low yields on Chinese government bonds and increased regulatory scrutiny of heavy domestic bond investment.

For years, dollar deposit rates at China’s largest state owned banks remained capped at relatively low levels. However, since earlier this year, account holders with larger balances have been able to negotiate significantly higher rates, with some smaller and foreign banks even advertising dollar deposits directly to attract customers. This has made holding dollars more appealing compared to yuan deposits, which continue to offer much lower returns.

Rising Dollar Liquidity Fuels Treasury Demand

The push comes as foreign exchange deposits in China have grown substantially, driven by strong export activity and record trade surpluses. With more dollar liquidity available domestically, banks have been able to fund higher-yielding Treasury purchases, benefiting from a noticeable rise in the ten-year Treasury yield in recent months.

Banking sources noted that this strategy also helps slow the yuan’s appreciation, offering some relief to a currency that has strengthened significantly against the dollar over the past year and easing pressure on domestic bond yields.

Uncertain Impact on Overall Treasury Holdings

While these purchases represent a shift in bank behavior, it remains unclear whether they will meaningfully increase China’s overall Treasury holdings, which have declined significantly in recent years according to official custodial data, though such figures may not fully capture holdings routed through other financial centers.