China Orders Banks To Cut Dollar Deposit Rates Amid Economic Pressures

China’s central bank has instructed local banks to lower interest rates on U.S. dollar deposits in a bid to curb dollar hoarding and stabilize the weakening yuan, sources familiar with the matter revealed. This move comes as mainland investors, especially retail clients and exporters, have amassed nearly a trillion dollars in deposits, drawn by higher U.S. yields and concerns over the yuan’s decline.

Over the past few weeks, the People’s Bank of China (PBOC) has directed financial institutions, both large and small, to implement cuts on dollar deposit rates. This strategy aims to discourage further accumulation of dollar deposits and encourage the conversion of those funds into yuan, sources said.

“We’ve received guidance from our superiors to reduce dollar deposit rates, and many of our peers have already made adjustments,” one banking source shared. “The regulators appear concerned about the growing proportion of dollars held domestically.”

The PBOC did not immediately respond to requests for comment.

Several banks have already made rate adjustments. Bank of East Asia announced on Wednesday that it would reduce its one-year dollar deposit rate on deposits of $20,000 or more, from 4.4% to 3.5%, effective from early March. Similarly, Bank of Nanjing lowered the interest rate on dollar deposits over $3,000 for three-month terms from 4.3% to 2.1% earlier this month.

While onshore dollar deposit rates in China remain lower than global averages — with three-month dollar deposits internationally yielding around 4.5% — they still outpace returns on yuan deposits, which offer interest rates of 1% or less for similar terms. The current disparity between high U.S. yields and China’s declining interest rates has led many Chinese investors to engage in a “carry trade,” where they place their savings in dollar deposits for better returns.

PBOC data shows foreign exchange deposits in China surged to $892.4 billion in January, the highest level since April 2023. Household foreign exchange deposits reached $146.1 billion, marking an 18% year-on-year increase, while corporate foreign exchange deposits grew to $451.9 billion.

The demand for foreign currency is evident as China’s commercial banks sold the most foreign exchange to their clients since July. At the same time, the “conversion ratio,” a measure of the public’s willingness to exchange dollars for yuan, dropped to its lowest level in seven months.

The widening interest rate gap between the U.S. and China has undermined the yuan’s appeal for onshore investors, with the gap reaching its largest margin ever in January. Additionally, geopolitical concerns, such as U.S. tariff threats and domestic economic instability, have further pressured the yuan, which has depreciated by 2.2% against the dollar since the 2020 U.S. presidential election.

In 2023, the PBOC limited the dollar deposit rate to 2.8% for the country’s five major state-owned banks: Industrial and Commercial Bank of China, Bank of China, Agricultural Bank of China, China Construction Bank, and Bank of Communications. These institutions control approximately 40% of the country’s banking sector. It remains unclear whether these banks will also face new rate cuts under the latest directive, though one source indicated that all banks, not just the largest, have been instructed to reduce their dollar deposit rates.