China Banks Ramp up FX Repos, Foreign Portfolio Inflows Rise

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Chinese banks ramped up their use of foreign exchange reverse repurchase agreements in April, central bank data showed, as they sought to deploy huge portfolio inflows.

Chinese banks lent a net 86.5 billion to counterparties on the repo market in April, against mostly local currency bonds as collateral. That was up from 70 billion in March and 2.1 billion in April 2020, Peoples Bank of China PBOC data showed.

The surge in the use of FX repos comes after regulators allowed and expanded the use of yuan bonds as crosscurrency collateral, ANZ economists Zhaopeng Xing and Raymond Yeung said.

The implementation of a settlement facility last June had also boosted trades, the ANZ economists added in a note.

Surging export receipts and investment flows helped lift the value of foreign cash deposits above 1 trillion for the first time in April, with Chinas banks struggling to lend it out and posing a risk to official efforts to control a fastrising yuan.

In late May, the PBOC moved to tighten onshore dollar liquidity, directing financial institutions to hold more foreign exchange in reserve.

As banks on the mainland struggle to deploy those dollar deposits, the collateralised dollars for yuan bonds repos allow foreign investors access to cheap foreign currency loans, while making such lending more secure for local banks.

The spike in repos indicated the dollars building up on bank balance sheets were portfolio flows, rather than any effort by the PBOC to intervene in yuan…

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