Dividends and China’s banks are bursting with US dollars, and that’s a worry

In global politics there are faults with every country, but sometimes looking at economics tells you what countries will and will not do. China does many things, some internal things few in the world like but China has a trump card – it is the center of the manufacturing of the world. As economies open up and demand more things, China is producing and selling them. In the case of the US, the ships coming from China are in such demand that it is cheaper to send them back empty than bring back some raw material with the ships.

In an article by Winni Zhou and Tome Westbrook of Reuters, the value of foreign cash deposits in China’s banks leapt over $1 trillion according to April’s reporting. The deposits have grown so large the banks are having a hard time to loan the currency, this poses a risk to the official efforts to control the price of the Chinese currency the yuan.

The yuan is trading at 6.4 times the price of a dollar and it has a real possibility of trading at 6.2 or 6.25 times the price of the yuan according to Rohit Arora, UBS’s Asia currency specialist. Mr. Arora expects the currency level to be near 6.38 at year end.

The People’s Bank of China (PBOC) has said that in mid June, the banks have to increase their reserves.

Paul Mackel a HSBC global FX strategies said the private sector has overtaken the central bank to absorb excess US dollar liquidity generate by the corporates and foreign investment inflows.

China is running the world’s largest current account surplus and government statistics show that half the dollar deposits are held by local companies.

Linking to dividend paying companies, in global politics it is easy to pick on China, but the reality is if the US picked on China too much they could dump US dollars and create many headaches for the US government. Even though the economies are inter related, good relationships are important to be maintained, although the countries will not agree on everything. In many manufacturing companies, as the 3rd largest economy in the world, many companies have and develop strong bases in China, which means the companies tend to be for the status quo in government relations.

There are more questions than answers, till the next time – to raising questions.

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