Dollar Funding Stresses in China

Abstract

The need for US dollar funding during the financial stresses in mid-March 2020, as the COVID pandemic news shocked markets, was evident in a number of countries. Notably, however, China’s dollar liquidity needs received little attention. Given China’s deepening economic and financial linkages to the United States and rest of the world, financial instability there could have implications for the global economy. We provide a deeper understanding of the dollar funding needs of Chinese banks and non-financial corporations and show that China’s vulnerability to US dollar funding risk is large and growing. We further discuss the existing and potential avenues through which US dollar funding could be supplied to Chinese entities in times of stress.

Keywords: Dollar funding, China, Central Bank Liquidity Provision, Currency Markets

JEL Classification: E58, F31, F34, F42