The macro strategist claims Chinese banks have gigantic dollar liquidity buffers offshore
At a time when the global economy seems to be tumbling into Covid recession, massive foreign exchange reserves and a relatively “closed” economy helped China alleviate its dollar funding stress. That’s what James Aitken suggests.
In a podcast interview with Real Vision Finance, the macro strategist said, “There’s the onshore Renminbi liquidity, which within reason, within political reason, can be managed to increase yield. Then there’s the gigantic dollar liquidity buffers that the biggest Chinese banks have offshore.
“That’s when I suddenly realised who owns all the dollar paper issued by Chinese corporations? Where is the bulk of it? The answer is tucked away in the treasury books of the biggest Chinese banks.”
Though there’s a smattering of other dollar papers that fall into the hands of sophisticated mutual funds, Aitken believes a lot of this dollar paper issued by wobbly Chinese corporates is tucked away in the dollar balance sheets of the big Chinese banks.
“I would suggest that they’re very interested in continuing to support the home team. I imagine it’s extremely unlikely that they’re a forced seller. If things got immensely grim in China, I would imagine that the People’s Bank would happily lend against dollar paper issued by the most critical Chinese borrowers,” he said.
Aitken also claimed to dispel the common myth that the Chinese financial system may someday require some amount of dollars to remain on an even keel.
“There’s one little magic trick that I think people may have overlooked after August 2015, yes, there was a lot of styles of Renminbi for dollars August 2015 onwards, but the magic trick is that those dollars did not leave the Chinese financial system.
They were redeposited with the Chinese banks,” he said.
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