Chinese state owned banks operate within a closed capital market under an authoritarian government and are owned directly by the Ministry of Finance. It would be foolish to believe they do not execute the desired policies of the Chinese Communist Party and the regulations imposed upon them. So what role are they playing in foreign exchange policies?
Before answering that question, we need to disaggregate the different aspects of foreign exchange management. There are two different aspects first the price setting or actual foreign exchange transactions and second the asset management role of the foreign exchange. Take a simple example, if a Chinese exporter ships a product to a foreign buyer they will receive US dollars but their labor and inputs are in RMB so they exchange the US dollars for RMB. The bank, in this case most of the time the Bank of China, executes the transaction exchanging US dollars for RMB. This does not, however, mean that Bank of China automatically becomes the US dollar asset manager.
A commercial bank, even a state owned one in China, holds currency for its clients. The banks, such as Bank of China do not have unencumbered rights to the currency they hold. This has two specific implications. First, when a Chinese exporter receives a US dollar payment from a foreign client, if they want to turn that into RMB to pay their bills they will sell USD and purchase RMB. The bank then will sell that USD to someone else.
Unlike the People’s Bank of China that can print money to sterilize USD inflows, the commercial banks have no such capability and so sell those US dollars to a counter party wanting to exchange RMB and obtain USD. The US dollars in this scenario do not become bank property to do with as they please.
Second, assume now the Chinese exporter does not sell the US dollars but holds them in a US dollar account in the Chinese bank. The bank does not have unencumbered rights to that money, rather they must earn a rate of return on that money while it remains in the account. The most common way banks do that is by lending out the currency to others needing capital which appears on the bank balance sheet as a loan. In this case, the USD appears twice on the banks balance sheet first as a liability from customer deposit and second as an asset as a loan to clients. The key point for our purposes is that it remains on the balance sheet.
Since the Chinese banks, as demonstrated in Part I and II, clearly are not showing US dollar assets on their balance sheets, we need to back up and review their activity in the actual transaction and movement of money. So what does data show about the Chinese bank activity in foreign exchange transactions and movement of non-RMB currency?
We will start with the China State Administration of Foreign Exchange dataset on the settlement and sales of foreign exchange. This dataset aggregates data on how much foreign exchange Chinese banks are buying and selling and who they are undertaking these activities for whether for clients or banks.
There are a few key data points worthy of note. First, while China is enjoying a large current account surplus, bank buying and selling of foreign exchange is actually very balanced. Since the beginning of 2022, Chinese banks have purchased $10.97 trillion USD but sold $10.63 trillion USD for a net difference of $335 billion. Put another way, in the last four and a half years Chinese banks of only been net buyers to the tune of $335 billion USD or a 3.15% net purchaser of flows. Given the more than $2 trillion US dollar current account surplus since the beginning of 2022, this represents a small net purchase flow by Chinese banks.
Second, despite the argument that the banks are soaking up US dollars the SAFE data directly refutes this hypothesis. Out of the $10. 96 trillion of non-RMB currency settled by Chinese banks since 2022 only 3. 8% of this was done “by banks for themselves” with the remaining 96. 2% done on behalf of clients. Sales of foreign exchange show a mirror pattern with banks responsible for 4. 9% of foreign exchange sales and the remaining 95. 1% sold on behalf of clients.
In other words, banks are facilitating the transactions on behalf of their clients they are not acting as the transacting party to absorb the USD. Even if clients were deciding to hold the USD and leave it at the transacting bank, they are not, these are not US dollars the bank would be able to use as shadow reserves given their encumbrance on behalf of clients.
This immediately presents a follow up question: if the banks are not the primary actor involved in the holding or management of non-RMB currency do we have evidence what bank clients are doing with their foreign exchange?
SAFE maintains yet another dataset on the cross border receipt and payment of currency both RMB and non-RMB into and out of China that more effectively tracks where currency actually goes. There are a few notable highlights that help us understand what is happening.
First, since the beginning of 2022, there has officially been a total of $33.2 trillion in cross border receipts into China with $866 billion into China in July 2026 alone. However, this was matched by $32.5 trillion in cross border payments leaving China with $806 billion leaving China in July 2026. This is definitely not perfectly balanced but it significantly reduces the current account discrepancy with total cross border net inflows of only $689 billion. However, there is more to this story.
Second, according to SAFE data since the beginning of 2022, there have been net receipts totaling $1.9 trillion US dollars. Given all the data we have presented so far beginning with Part I on how many US dollars the banks say they have to Part II where the regulators record how many US dollar they declare the banks have, this number is a clear outlier. If the banks have been processing net inflow receipts of $1.9 trillion, much closer to the current account number the question becomes where have the US dollars gone?
The combination of both datasets leads to a very clear conclusion on the activity of Chinese state owned banks: they are heavily involved in price setting of the RMB but they are not a primary party in the management of US dollars acting almost exclusively on behalf of clients moving large amounts of money globally. Put in stark economic terms, the banks are acting as price setting transactors but not as long term asset managers.
The data from Chinese sources so far has painted a very clear, consistent, and linear picture of US dollars coming into China. If there are $1.9 trillion USD of net payments into China without a corresponding transaction to move those USD abroad, the basic assumption should be that those USD are in the Chinese financial system. However, there has been no discernible increase in US denominated investment in China; no discernible increase in USD denominated lending by Chinese banks in China or around the world.
It must be emphasized that these are not marginal differences. Official foreign exchange reserves have drifted up and Chinese bank non-RMB assets and liabilities have ticked up slightly, but the differences remain enormous. At the risk of being flippant, the discrepancies remake the old saying a trillion here a trillion there, and pretty soon your talking real money.
As we have emphasized from the beginning, there is no question there are large imbalance and US dollar flows associated with a very real Chinese current account surplus. The question is no longer whether the Chinese banks hold the US dollars, there is so far no evidence they do, but what is happening to the US dollars that enter China and then effectively disappear. Where is that money going?
Just because the banks do not officially have the US dollars does not mean the US dollars do not exist. The question becomes where are those dollars and who controls them?