China exporters loath to convert dollars even as yuan jumps

Chinese exporters want to hold onto their dollars rather than convert them into yuan, despite the currency’s sudden sharp gains this week, bankers told Reuters.

The yuan has jumped 2% against the dollar, erasing a big part of its losses from earlier this year, meaning exporters who withheld their foreign exchange receipts in anticipation of better conversion rates missed an opportunity.

Rampant dollar hoarding by exporters has been one big factor behind the yuan’s depreciation, and widely watched by markets. The yuan hit an eight-month low of 7.2776 per dollar late July.

A Reuters survey of more than a dozen commercial banks this week showed only two saw a little uptick in foreign exchange (FX) settlements, while others said their clients showed increased interest in stocking up on dollars.

“With the challenges in the domestic economy and financial markets, exporters see limited incentives to convert their FX receipts into the yuan,” said Gary Ng, senior economist for Asia-Pacific at Natixis.

The latest official data showed that the market’s FX settlement ratio, which measures how much foreign revenue is converted into yuan, fell to a near 2-1/2-year low of 58.1% in June.

Ng said if the dollar-yuan pair were to reach 7.0 “with a clearer path that it will appreciate further,” there may be more of an incentive to convert dollars.

The yuan leapt to a seven-month high this week of 7.1120 per dollar as global carry trades unwound, the Japanese yen rallied and expectations rose for Federal Reserve interest rate cuts.

Chinese exporters typically hoard dollars to benefit from higher U.S. yields and yuan depreciation, as a carry trade. The yield gap between the dollar and yuan has been widening as China eases policy to aid a struggling economy.

“Exporters will convert their dollar deposits into the yuan only once interest rates are more in equilibrium, which will likely only happen once the Fed rate cuts are well under way,” Lynn Song, chief China economist at ING.
Source: Reuters (Reporting by Shanghai Newsroom; Editing by Vidya Ranganathan and Sonali Paul)