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Commercial Banks in China Experiencing Dollar Squeeze

05/02/2019

The combined dollar liabilities at the four biggest banks in China now exceed their dollar holdings. The institutions comprise the Bank of China, Agriculture Bank of China, Industrial and Commercial Bank of China and the China Construction Bank.  At the end of 2008, the Bank of China was $70 billion in deficit but claimed that off balance sheet dollar assets covered the shortfall.  The three other banks collectively showed a dollar surplus on their balance sheets amounting to approximately $15 billion.

 

Banks in China require dollars since currency derivatives mature within 12 months requiring regular renewal.  China is active in the swap market with other central banks but does not have an agreement with the U.S. Federal Reserve. 

 

China is however in no danger of embarrassment over the shortfall of dollars since the Central Government apparently holds $3.1 trillion in foreign exchange reserves and would come to the aid of any quasi-commercial bank all of which operate with close state supervision.  The dollar is still regarded as the most significant currency for international trade with many commodities including oil and gold bear dollar denominations.  The Chinese yuan is not universally accepted and conversion is difficult.

 

If a trade agreement is negotiated, China may still show a preference towards Brazil and Argentina for purchases of soybeans and other commodities if they can pay with their own currency or effect a state-sponsored barter transaction.  Clearly if the magic wand could resolve trade differences immediately, the U.S. may not reclaim the Chinese export market which has been profoundly eroded.  This has implications for the agricultural sector.  Prices of soybeans and hence meal will remain depressed and this will influence production costs for all monogastric livestock. Perhaps we will never revert to pre-trade war equilibrium. Belgian endives anybody?