Yuan Breaks 6.70, Dollar Deposit Investors Suffer Principal Loss on FX Conversion

Source: Times Weekly | Author: Huang Yukun

The renminbi (RMB) has hit a nearly three-year high against the U.S. dollar, even as some Chinese banks quietly raise interest rates on U.S. dollar time deposits to as high as 4%. But analysts warn that exchange rate risks could erode—or even wipe out—the gains.

Fed Rate Hike Triggers Dollar Deposit Adjustments

On September 16, the U.S. Federal Reserve raised the federal funds rate target range by 25 basis points to 3.75%–4.00%, marking its first rate increase since July 2023. The decision was unanimous (12–0).

According to the latest quarterly economic projections and dot plot, the median forecast for the federal funds rate at the end of 2026 was raised from 3.8% (June) 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
• None expect a rate cut this year

Banks Raise Dollar Deposit Rates Ahead of Fed Move

Since September, multiple Chinese banks have increased their U.S. dollar time deposit rates. Most now offer rates above 2.8% for one-year terms, with some city commercial and foreign banks offering up to 4%.

Key Rate Highlights

| Bank | Term | Rate | Minimum Deposit | Notes | |------|------|------|----------------|-------| | Bank of China (Shanghai) | 1 year | 3.1% | $10,000 | Offline only, daily quota limited | | Bank of China (Shanghai) | 1 year | 2.8% | $5,000 | Rate adjusted daily | | Bank of Communications (Shanghai) | 1 year | 2.85% | — | Recently raised from 2.8% | | China CITIC Bank, Jiangsu Bank, Nanjing Bank | 1 year | 3.0% | — | No recent adjustment | | Guangdong Huaxing Bank | 1 year | 4.0% | $10,000 | Highest among surveyed banks |

Foreign Banks Offer Higher Rates

Bank of East Asia (September promotion):

• $10,000–$50,000 (excl.): 3-month: 3.40%, 6-month: 3.40%, 12-month: 3.35%
• $50,000+: 3-month: 4.00%, 6-month: 3.70%, 12-month: 3.35%
• Compared to August, 6-month and 12-month rates rose by 5 bps and 15 bps respectively for the lower tier; for the higher tier, rates rose by 60 bps, 15 bps, and 10 bps.

Public Bank (Shenzhen branch, as of September 14):

• 1-month: 3.45%
• 3-month: 3.80%
• 6-month: 3.80%
• 1-year: 3.90%
• Minimum deposit: $2,000

As of September 18, the bank reported further increases: 3-month at 3.90%, 6-month at 4.00%, and 1-year at 4.10%.

Most bank staff told Times Weekly they have not yet received notice of further rate increases. One股份制银行 relationship manager noted that the bank's current maximum dollar deposit rate is 3%, and based on past experience, a small increase may follow the Fed's move.

Why Banks Are Raising Dollar Deposit Rates

Lou Feipeng, researcher at China Postal Savings Bank, attributed the increases to:

• Expectations of further Fed rate hikes
• Banks seeking to lock in interest spreads during a favorable window
• Rising RMB reducing customers' willingness to convert currency, forcing banks to raise rates to retain foreign currency deposits
• Low RMB deposit rates, prompting banks to use higher dollar rates to optimize liability structure

Xue Hongyan, special researcher at Suzhou Bank, added that the dual drivers are:

• The rising U.S. dollar interest rate benchmark
• Domestic banks' need to manage RMB and foreign currency liabilities

He noted that as RMB deposit rates continue to fall, banks are using higher dollar rates to offset weaker RMB deposit demand, divert household funds, and optimize foreign currency liabilities. Increased competition among Chinese and foreign banks for deposits is also pushing rates higher.

RMB Hits Three-Year High: Exchange Rate Risk Looms Large

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

A Cautionary Tale

One investor told Times Weekly that in 2025, they converted approximately RMB 29,200 into $4,000 at an exchange rate of about 7.30 and placed the funds in a one-year time deposit at 2.8% interest. Now that the deposit has matured, with the RMB strengthening past 6.70, converting back to RMB would yield only about RMB 27,550—a loss of roughly RMB 1,650, 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.

Xue Hongyan emphasized: "Dollar time deposits appear to be deposits, but they inherently embed exchange rate risk—this is the most easily overlooked hidden cost."

He warned that if the RMB appreciates during the deposit period, exchange losses could offset or even exceed interest income, potentially eroding principal. Early withdrawal typically incurs demand deposit interest, making it difficult to stop losses during a sharp short-term RMB rally.

"This is by no means a risk-free arbitrage tool. Ordinary investors should strictly control position sizes, choose short maturities, and maintain a neutral awareness of exchange rate risk," Xue said.

Expert Views on Future Rate and Exchange Rate Trends

Is a New Rate Hike Cycle Beginning?

Xue Hongyan believes this rate hike is more of a phased, preventive tightening rather than the start of a new aggressive cycle. He noted that the U.S. economy is showing a K-shaped divergence and lacks the foundation for consecutive, large rate increases—unless oil prices spiral out of control and reignite inflation's secondary effects.

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 impact.

"Further rate hikes will still support dollar deposit rates, but since banks have already raised rates in anticipation, subsequent increases are more likely to be structural and modest rather than across-the-board. Current mainstream rates are already relatively high, and upside is constrained by both the limited total Fed hikes and expectations of future rate cuts," he said.

RMB Outlook

Wang Qing, chief macro analyst at Dongfang Jincheng, attributed the RMB's September 18 strength to two factors:

1. The U.S. dollar index fell back after the Fed's rate decision
2. The PBOC has been setting the midpoint rate on the stronger side

Wang expects the RMB to maintain a stable-to-strong trend in the near term, with a core trading range of 6.70–6.90 by year-end. He predicted a "strengthen first, then stabilize" pattern for the full year.

Who Should—and Shouldn't—Invest in Dollar Deposits?

Lou Feipeng offered the following guidance:

Suitable candidates:

• Those with genuine U.S. dollar needs
• Those holding dollar assets seeking preservation
• Investors who expect RMB depreciation and can tolerate exchange rate fluctuations

Not recommended for:

• Those converting RMB to dollars purely for high interest
• Those with near-term RMB liquidity needs

Lou Feipeng summarized: "The actual return on foreign currency deposits is determined by both interest income and exchange gains/losses. RMB appreciation can erode or even eliminate interest earnings. There are also liquidity risks and interest rate volatility risks arising from Fed policy uncertainty."

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