Chinese Exporters' $500 Billion Dollar Hoard: A Potential Catalyst for Yuan Surge

Chinese exporters have accumulated an estimated $500 billion in U.S. dollar reserves. Analysts suggest that converting even a fraction of this sum into yuan could significantly impact the Chinese currency’s value. Despite some skepticism due to current asset returns, the situation remains dynamic, influenced by FX conversion ratios and international interest rate differentials.

Chinese exporters have amassed a U.S. dollar hoard estimated at about $500 billion, which could turbocharge the already rallying yuan if those businesses start buying the Chinese currency, analysts said.

Non-financial corporate foreign exchange (FX) deposits hit $431.7 billion in July, according to central bank data, while a Barclays estimate derived from FX settlement and transaction data put Chinese companies' total dollar holdings at about $500 billion. Goldman Sachs estimates, based on FX conversion ratios, suggest an increase of about $700 billion in 'excess' FX holdings by Chinese firms since 2020.

Even a partial reversal of such a large position can move the market and momentum is in the yuan's favor. A six-week rally has wiped out year-to-date losses and blown past chart resistance at 7.1 per dollar, potentially triggering the conversion of hundreds of billions of dollars to yuan by exporters. Dollar hoarding was a big factor behind the yuan's slide through to the end of July, as 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 worked behind the scenes to ensure the currency does not spike abruptly, and some analysts are skeptical that too many businesses will turn yuan buyers while the return on Chinese assets remains relatively low.

'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 & Rates Strategy 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, and 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.

(With inputs from agencies.)