Dedollarisation: China's state-owned banks cut interest rates on dollar deposits to boost forex trade in yuan

China is prepping its yuan to become the next dollar and the global reserve currency. In the latest salvo fired at the dollar, China has told its state-owned banks to substantially reduce interest on dollar deposits, a Reuters report said.

In China, interest rates offered by the banks on dollar deposits of $50,000 and above have been capped at 4.3 per cent, the report quoted people with the knowledge as saying.

The lowered interest rates came into effect in China from Tuesday, 6 June.

The rates which big banks can offer on dollar deposits are expected to be reduced by as much as 100 basis points from the previous limit of 5.3 per cent.

How will it help China?

Lower interest rates on dollar deposits will encourage Chinese companies, especially exporters, to settle their overseas trade in China’s yuan.

As per Reuters report, a buoyant dollar and the Federal Reserve’s aggressive interest rates hikes since last year have prompted many Chinese companies to hoard dollar receipts.

Meanwhile, the report said that since January this year, yuan has lost more than 6 per cent against the dollar.

China has been settling trade with Russia, Brazil and several other countries in yuan.

The decision of lowering the dollar deposit rate comes after the central bank said last month it would resolutely curb large fluctuations in the exchange rate and study the strengthening of self-regulation of dollar deposits.

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