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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This communication is issued by Eurizon SLJ Capital Limited (“ESLJ”), a private limited company registered in England (company number: 09775525) having its registered office at 90 Queen Street, London EC4N 1SA, United Kingdom. ESLJ is authorised and regulated by the Financial Conduct Authority (FRN: 736926). This communication is treated as a marketing communication intended for professional investors only and is provided only for information purposes. It has not been prepared in accordance with legal and regulatory requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. It does not constitute research on investment matters and should not be construed as containing any recommendation, advice or suggestion, implicit or explicit, with respect to any investment strategy or financial instruments, or the issuers of any financial instruments, or a solicitation, offer or financial promotion relating to any securities or investments. ESLJ and its affiliates do not assume any liability whatsoever for the contents of this communication, save to the extent agreed in any written contract entered into between ESLJ and the recipient, and do not make any representation or warranty as to the accuracy or completeness of any information contained in this communication. Views are accurate as at the time of publication. Opinions expressed by individuals are their own and do not necessarily reflect those of ESLJ or any of its affiliates. The value of any investment may change and an investor may not get back the original amount invested. Past performance is not an indicator of future performance. This communication may not be reproduced, redistributed or copied in whole or in part for any purpose. It may not be distributed in any jurisdiction where its distribution may be restricted by law and persons into whose possession this communication comes should inform themselves about, and observe, any such restrictions.
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