Analysts see few risks for country from dollar shortage

China is unlikely to have funding difficulties due to the global dollar shortage, given its large foreign exchange reserves and the opportunities for overseas investors, experts said on Wednesday.

The nation has no reason to worry about dollar liquidity stress due to the global financial turbulence amid the coronavirus pandemic, analysts close to the central bank told China Daily.

The nation's large foreign exchange reserves, which exceeded $3 trillion in March, will be a cushion for the dollar-denominated debts of Chinese businesses. China's economic recovery following the outbreak will also attract inflows of foreign capital seeking higher investment returns, said Guan Tao, chief global economist of BOC International (China) Co Ltd and a former official with the State Administration of Foreign Exchange.

The People's Bank of China, the central bank, has conducted bilateral renminbi swap lines with more than 30 central banks, totaling about 3.5 trillion yuan ($495 billion). "If necessary, the central bank can temporarily use some of the renminbi swap quota," said Guan.

As the coronavirus has spread across the world, financial turmoil in recent weeks has crimped the supply of dollar funding from financial intermediaries, with financing costs sharply increasing to a level last seen during the 2008 global financial crisis.

The US Federal Reserve set up a new facility, the so-called FIMA Repo Facility, on March 31 and it was available beginning on Monday. That is a temporary arrangement for at least six months, aimed at quelling stresses in dollar funding markets.

The FIMA Repo Facility should also help ease strains in global US dollar funding markets, said the US central bank, after it extended dollar swap lines worth a total of $450 billion on March 19 to nine central banks in nations including Mexico, Brazil, Australia and Singapore, to ease the global dollar liquidity shortage.

A dollar swap is an arrangement under which central banks can receive dollars through exchanging the counterpart currency as collateral, with an agreement to change the currency back in a certain period.

"Some geopolitical reasons have precluded a swap line between the world's two largest economies, but the recent measures taken by global central banks to increase dollar supply will also help Chinese businesses to ease their dollar-denominated debt burdens," said Xie Le, chief economist in Asia for Spanish banking group Banco Bilbao Vizcaya Argentaria.

In the face of global financial market uncertainty and dropping bond yields, "Chinese investors don't have to worry about the safety of the nation's holdings of US Treasurys," Sheng Songcheng, deputy head of the Shanghai-based CEIBS Lujiazui Institute of International Finance, told China Daily on Wednesday.

China held about $1.08 trillion of US Treasurys as of January, up by $8.7 billion in that month, making it the world's second-largest holder after Japan. Foreign investors are holding about $6 trillion worth US government bonds in total, according to data from the US Department of the Treasury.

However, a shortage of dollar liquidity, surging virus cases and worsening macroeconomic data could remain the "three main drivers" that might influence risk sentiment, according to Stephen Chiu, Asia Foreign Exchange and Rates Strategist of Bloomberg Intelligence.

"Beyond this, a de-dollarization theme could kick in and support a structural dollar downtrend, which could come in late in the second quarter or in the second half of this year, he said.

"Dollar financing costs have narrowed after central banks deployed the swap lines, but broader policy challenges remain in ensuring the resilience of the dollar funding markets and that central bank liquidity is channeled beyond the banking system," said a research note from the Bank for International Settlements.