Trade War Fear Fans Rush For Foreign-Currency Deposits In China

Chinese corporates and households ramped up foreign-currency deposits in January, signaling concern over potential yuan depreciation in the backdrop of trade tensions with the US. 

Total foreign-currency deposits onshore rose nearly $40 billion in January, the largest monthly increase since April 2021, according to data from the People’s Bank of China released Friday. Both the residents and the non-financial enterprises increased such savings, the data show.

The rush to convert yuan into foreign currencies underscores concern that the local unit would depreciate in case of an escalation of a trade war with the US. While the yuan has bounced back from a one-year low touched in January, on the possibility of an end of the war in Ukraine, the prospect of reciprocal US tariffs from Donald Trump’s administration still poses a risk for the currency.

Several rounds of deposit rate cuts by Chinese banks due to a weak economy have made higher yielding foreign currencies more attractive for investors. Chinese citizens may also kick off foreign-currency conversion in 2025 as they have a quota of $50,000 that resets at the beginning of each year.

There tends to be a seasonal rise in foreign-currency deposits at the start of a year and “the fear of yuan depreciation picked up significantly after Donald Trump’s US election victory, so an uptick of FX deposits starting in December reflected this sort of trend,” said Lynn Song, chief Greater China economist at ING Bank NV.

“It will be interesting to see if this number keeps rising in February’s data” now amid optimism over Chinese tech, general dollar softening and US-Russia talks on Ukraine, he said.

Foreign-currency deposits in China rose to $892.4 billion in January from $852.9 billion in the previous month.