China Allows Some Banks to Offer Higher Rates on Dollar Deposits

China is allowing some banks to offer higher interest rates on corporate US dollar deposits, according to people familiar with the matter, a move that may damp the yuan’s recent gains by encouraging companies to slow their currency conversion.

A handful of Chinese banks, including some state-backed lenders, have been told by authorities they can collect onshore dollar deposits at rates above the US Secured Overnight Financing Rate said the people, who asked not to be identified discussing private matters. The SOFR is around 3.61%.

The move signals a relaxation of an imposed in 2023, when the yuan was under pressure. At the time, regulators worried that higher dollar deposit rates would encourage companies to shift funds from the local currency into dollars to earn better returns, which would further weaken the yuan.

At least three banks have received the guidance in recent days but have yet to take action, the people said.

Representatives of China’s Interest Rate Self-Regulatory Mechanism, an that coordinates market pricing under the guidance of the People’s Bank of China, did not respond to Bloomberg’s calls during office hours.

While Chinese banks had previously used structured products to attract dollar deposits above the SOFR cap, according to the people, the latest guidance gives lenders more flexibility to compete for foreign-currency funds. It could also encourage companies to keep export proceeds and other cash holdings in dollars rather than converting them into yuan, helping to curb appreciation in the Chinese currency.

The onshore yuan has gained more than 3% against the dollar this year to 6.77 on Friday, making it Asia’s best-performing currency, as improving sentiment toward Chinese assets boosted demand. Analysts have been further gains, with Goldman Sachs Group Inc. expecting the currency to strengthen to about 6.5 in the coming year.