Rising foreign currency liquidity of banks in China

Guonan Ma and Robert McCauley

BIS Quarterly Review, 2002

Abstract: China’s banking system enjoyed a $75 billion foreign currency surplus in 1999–2001. Most of this foreign currency liquidity arose from the growth of dollar deposits, and the rest from shrinking dollar loans. Understanding such surpluses provides insights into a significant source of financing for the US current account deficits in recent years. This special feature examines determinants of the demand for foreign currency deposits in Chinese banks. It is found that interest rate differentials, exchange rate concerns and the one-off effect of the liberalisation of part of China’s stock market jointly account for almost half their variation. We also analyse the recent declining trend of dollar loans booked by banks in China, and its implications for the strengthening foreign currency liquidity position of banks on the mainland.

Date: 2002
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