The People’s Bank of China (PBOC) has ramped up its lending to the country’s banking system by 50% since mid-2022. This may be a response to the migration of business deposits out of smaller commercial banks. The data available to me are not yet sufficient to explain why these deposits are leaving. It could be that the businesses that banked with smaller and mid-sized banks are facing unusual amounts of stress, or it could be that those businesses are worried about the safety of deposits held outside of the biggest banks. Either way, it is a novel development that is worth tracking for understanding the evolution of the Chinese financial system.
- Date Posted:
- February 6, 2024
Usually, a band is maintained by the central bank, which buys or sells foreign exchange as needed to keep the market price of the yuan within said band. But that doesn’t seem to be what China did. The foreign currency balance sheet of the PBOC was totally flat for most of 2023 (hence the PBOC’s assertions that it is mostly out of the currency market). There were adjustments to banks’ required reserve ratio that freed up a bit of foreign exchange held in the banks’ reserves, but the PBOC doesn’t seem to have used any of its own funds to keep the yuan inside the weak edge of the band from August through October. With a bit of digging, it is possible to get a relatively clear understanding of how the PBOC avoided intervention when the fix was fixed and the yuan was at the weak edge of the band: there are multiple reports suggesting that the PBOC leaned on China’s state banks to do its dirty work.