Extract from our "A Dollar Avalanche Building in China" research paper, published on the 27th June 2023. Register for a free trial* to access the full paper.
Chinese corporates continue to hoard dollars. The total stock of dollars held by Chinese entities continues to rise. The dollar’s high carry may at present seem enticing to Chinese entities, but this configuration is fundamentally unstable. Prospective rate cuts by the Fed and/or an economic reacceleration in China could lead to a precipitous fall in USDCNY, as corporate treasurers in China scramble to sell the dollars they don’t need to have. We believe this is a major risk for H2 2023.
The full report contains the following sections:
- A disconnect between China’s balance of payments and USDCNY
- The missing trillion dollars in deposits
- Fresh snow continues to build up, raising the risks of an avalanche one day
- Trigger 1. The Fed turning dovish later this year
- Trigger 2. A recovery in confidence in China
- Capital outflows as per capita income rises
- China does not need external financing
- Private capital outflows are preferred to reserve accumulation
- Bottom line
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