Yuan Breaks 6.70, High-Yield USD Depositors Lose Principal on FX Moves

Source: Times Weekly | Author: Huang Yukun

The renminbi has surged to a nearly three-year high against the U.S. dollar, even as Chinese banks quietly raise interest rates on U.S. dollar time deposits. Some lenders now offer annualized yields of up to 4% on one-year dollar deposits—far exceeding comparable renminbi deposit rates. But analysts warn that exchange rate fluctuations could erase those gains.

Fed Rate Hike Triggers Dollar Deposit Rate Increases

On September 16, the Federal Reserve raised its benchmark interest rate by 25 basis points to a target range of 3.75%–4.00%, the first rate increase since July 2023. The Federal Open Market Committee (FOMC) voted unanimously (12–0) for the move.

The Fed also released updated quarterly economic projections and its "dot plot." The median forecast for the federal funds rate at the end of 2026 was raised from 3.8% (June estimate) to 4.1%. Among the 18 officials who submitted projections:

• 16 expect at least one more rate hike this year
• 4 anticipate two additional hikes
• 2 see no further action needed in 2025
• None expect a rate cut this year

In anticipation of further tightening, multiple Chinese banks have already raised their U.S. dollar deposit rates.

Bank-by-Bank Snapshot of Dollar Deposit Rates

| Bank | Term | Rate | Minimum Deposit | Notes | |------|------|------|----------------|-------| | Bank of China (Shanghai branch) | 1 year | Up to 3.1% | $10,000 | In-branch only, daily quota limited; $5,000 tier offers 2.8% | | Bank of Communications (Shanghai branch) | 1 year | 2.85% (raised from 2.8% in September) | Not specified | Rate adjusted once in September | | China CITIC Bank | 1 year | 3.0% | Not specified | No recent adjustment | | Jiangsu Bank | 1 year | 3.0% | Not specified | No recent adjustment | | Bank of Nanjing | 1 year | 3.0% | Not specified | No recent adjustment | | Guangdong Huaxing Bank | 1 year | Up to 4.0% | $10,000 | Highest among domestic banks surveyed | | East Asia Bank (foreign bank) | 3 months | Up to 4.00% | $50,000 | New customer rates; 6-month: 3.70%, 12-month: 3.35% | | East Asia Bank (foreign bank) | 3 months | Up to 3.40% | $10,000–$50,000 | New customer rates; 6-month: 3.40%, 12-month: 3.35% | | Public Bank (Shenzhen branch) | 3 months | 3.90% | $2,000 | As of Sept. 18; 6-month: 4.00%, 1-year: 4.10% |

Foreign banks generally offer higher rates than domestic lenders. East Asia Bank's September promotion, for example, raised 6-month and 12-month rates by 5 and 15 basis points respectively for lower-tier deposits, and by 60, 15, and 10 basis points for higher-tier deposits compared to August.

Most bank staff told Times Weekly they have not yet received notice of further increases. One joint-stock bank relationship manager noted that based on past experience, a small upward adjustment may follow the Fed's latest move.

Why Banks Are Raising Dollar Deposit Rates

Lou Feipeng, a researcher at the Postal Savings Bank of China, attributed the trend to multiple factors:

• Fed rate hike expectations – banks are locking in spreads while they can
• Renminbi appreciation – as the yuan strengthens, customers are less willing to convert to dollars, forcing banks to raise rates to retain foreign-currency liabilities
• Declining renminbi deposit rates – banks use higher dollar yields to offset lower yuan returns and optimize their liability structure

Xue Hongyan, a special researcher at Sushang Bank, added that the combination of a rising U.S. rate anchor and intensifying competition among Chinese and foreign banks for dollar deposits is pushing pricing higher.

The Hidden Risk: Currency Fluctuations

Despite the attractive headline rates, analysts stress that the real return on foreign-currency deposits depends on both interest income and exchange-rate gains or losses.

On September 18, the onshore and offshore renminbi both strengthened past 6.70 against the dollar, hitting their highest levels since January 2023. The People's Bank of China set the daily midpoint at 6.7521, up 59 pips from the previous day, bringing the year-to-date adjustment to 3.94%.

A Cautionary Example

One investor told Times Weekly that in 2025, when the exchange rate was around 7.30, they converted 29,200 yuan into $4,000 and placed it in a one-year time deposit at 2.8% interest. Now that the deposit has matured, with the yuan trading above 6.70, converting back would yield only about 27,550 yuan—a loss of roughly 1,650 yuan, or about 5.7% over one year.

Even if the investor had locked in a 4% rate, they would still face a loss at current exchange levels.

"On the surface, dollar time deposits are deposits, but in essence they embed currency risk—this is the hidden cost most easily overlooked," said Xue Hongyan.

He emphasized that if the renminbi appreciates during the deposit period, exchange losses can offset or even exceed interest income, eroding principal. Early withdrawals typically earn only demand deposit interest, making it difficult to stop losses during a sharp yuan rally.

"It is by no means a risk-free arbitrage tool. Ordinary investors who participate should strictly control position sizes, choose short maturities, and cultivate a currency-risk-neutral mindset."

Outlook: Will the Fed Start a New Hiking Cycle?

Xue Hongyan believes the September rate hike is more of a "precautionary tightening" than the start of a new aggressive cycle. The U.S. economy is showing a K-shaped recovery, he noted, which does not support consecutive large hikes—unless oil prices trigger a secondary inflation surge.

While the dot plot appears hawkish, with most officials expecting at least one more hike this year, Xue expects a "moderate, intermittent path with limited cumulative magnitude."

Lou Feipeng added that for investors with genuine dollar needs—such as those holding dollar assets or those who expect the yuan to weaken and can tolerate volatility—dollar deposits may be appropriate. However, he cautioned:

"For those simply converting renminbi to chase high interest, or those with near-term renminbi cash needs, dollar deposits are not recommended."

Wang Qing, chief macro analyst at Dongfang Jincheng, said the renminbi's recent strength was driven by two factors: the dollar index pulling back after the Fed's rate decision, and the PBOC's continued guidance of the midpoint toward a stronger direction.

He expects the yuan to remain "stable with a slight strengthening bias" in the near term, with a core trading range of 6.70–6.90 by year-end. The overall trajectory for 2025, he said, is likely to be "strengthen first, then stabilize."

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