China’s $1.2 trillion windfall quietly seeps into global markets – News Air Insight

A record trade surplus racked up by China is washing up around the world, as export earnings that once ended up in state coffers instead fund massive private purchases of overseas securities and business expansion abroad.

Rather than leaving most of last year’s $1.2 trillion windfall in the hands of the central bank, some two-thirds of the foreign assets sourced primarily from global trade ended up with companies, individuals and state lenders. That brings with it the risk of a sudden capital reversal that China doesn’t immediately control, especially in a world where the yuan is allowed to strengthen.

Investors comprising China’s so-called non-official sector saw their holdings of assets abroad soar by more than $1 trillion in the first three quarters of last year — according to the latest available data from China’s currency market regulator — more than double the annual average growth in the past decade.

Putting that money to work last year resulted in a $535 billion surge in Chinese private purchases of overseas securities like US stocks, European bonds and mutual funds, Bloomberg calculations show, though a more detailed geographical breakdown of the investments isn’t available. The increase through September outpaced any full-year increase over the past two decades and was far more than poured out of China in the form of direct investments used to build factories and warehouses or expand staffing abroad.

The quiet migration of capital into global markets is ushering in a new era that does away with a centralized system of managing the wealth reeled in from China’s outsized role in manufacturing and commerce. For a world already uneasy over the huge imbalances in trade, another outcome is a global financial system increasingly reliant on liquidity sourced from China.

“As China’s private investment footprint grows, it will inevitably play a larger role in global capital flows,” said Peiqian Liu, an Asia economist at Fidelity International, which manages about $1 trillion.

How lasting a change it proves to be depends in large part on what happens within China. What’s not in doubt is that it’s storing up risks for markets overseas and at home.

In the event of a rapid yuan appreciation and fund repatriation, Liu said “we could witness a chain reaction of exporters settling their foreign exchange and capital inflows increasing, leading to a fundamental directional reversal.”

Signs are already appearing of large repatriation of capital. Based on official data released Thursday, China in December recorded its “largest-ever” inflows of $128 billion — the most since 2015 — amid a sharp rise in companies’ conversion of foreign-exchange into the yuan, according to Goldman Sachs Group Inc.

The People’s Bank of China and the State Administration of Foreign Exchange, or SAFE, didn’t immediately respond to requests for comment.

With more leeway from Beijing to deploy the money, Chinese institutions can embed themselves deeper inside the plumbing of world finance, making them more resistant to sanctions and harder for Western regulators to track.

The shift, years in the making, sped up as Donald Trump won reelection to the US presidency in 2024. It was the culmination of a campaign pursued by Beijing for two decades that envisioned “storing foreign-exchange with the people” instead of leaving it to the central bank.

Now, thanks to the surge in portfolio investments abroad, foreign assets held by China’s non-official sector surpassed total external debt for the first time ever last year, Bloomberg calculations showed.

“The year of 2025 may mark the beginning of China’s transition toward becoming a mature net creditor nation,” said economists at Bank of China International Securities including Guan Tao, who previously headed the SAFE’s balance of payments department. “It also implies an intensified sensitivity within the private sector to yuan appreciation.”

About two decades ago, every dollar earned by an exporter had to be handed over to the state. But after China’s entry into the World Trade Organization at the start of the millennium, soaring exports led to a surge in foreign reserves, a blowup in domestic inflation and political pressure from the West.

That set off a change to the old ways — in a slow transformation that only grew more urgent after the Group of Seven countries moved to freeze some $300 billion of Russian central bank reserves in punishment for the invasion of Ukraine four years ago.

The process by which the trade surplus transforms into private-sector foreign assets is similar to a recycling mechanism that bypasses the PBOC’s balance sheet.

Instead of selling their dollar earnings to the authorities in exchange for yuan — a traditional practice in the old centralized regime — exporters can now park the money at commercial lenders or retain it on their books.

Trade Bonanza
As China navigated the perilous geopolitics that came with Trump, its exporters were minting billions of dollars in new wealth.

Last year, higher US tariffs prompted Chinese companies to ship more goods to other markets around the globe. With imports held back by weak domestic demand, swelling exports produced the biggest trade surplus in world history.

By the end of September, Chinese private investors already owned $7.8 trillion of foreign assets, with an increase that outpaced the buildup of official reserves by nearly five times. When counted together, China has now amassed a stash abroad bigger than the entirety of foreign assets owned by Japan — Asia’s second-largest economy with an enormous hoard of offshore investments.

The total value of foreign assets held by China’s non-official sector adds up to a sizable pool of funding, accounting for the equivalent of more than a quarter of the $30 trillion Treasury market.

As foreign-exchange proceeds pile up, the banks can use their idle liquidity to purchase offshore securities or to lend to companies expanding abroad. Large firms can also use their export proceeds to fund overseas direct investments and buy foreign assets.

The PBOC has itself been linked to these operations. It has long been suspected of using the so-called foreign-exchange swaps with domestic lenders when it carries out stealth intervention in the currency market. That effectively places dollar liquidity that’s supposed to be on the PBOC’s balance sheet onto the banks’ books.

“The PBOC has been using large state banks as conduits for the interventions,” resulting in higher foreign-exchange asset at banks, said George Magnus, research associate at Oxford University’s China Centre and former Chief Economist at UBS Group AG. “It is likely that these assets are in US dollars or clones like the Aussie and the Canadian dollar, or the yen.”

In addition, official data also indicates that about 30% of China’s trade is now settled in the yuan, which doesn’t count toward foreign assets.

The surge in foreign holdings by non-official investors from China aligns with a broader influx of private-sector capital into American equities in the 12 months through October, according to the US Treasury.

Investors in Hong Kong and Belgium — hubs widely regarded as primary custodial proxies for Chinese customers — bought American shares on a net basis in the same period, the data showed. China’s official data doesn’t detail the countries or instruments targeted by private investors.

Brad Setser, a former Treasury official now at the Council on Foreign Relations, said the return of dollar accumulation by China’s big state commercial banks “will increase their presence in a range of short-term funding markets globally.”

‘Even Bigger’
Beyond Treasury and agency debt, they “are comfortable buying a range of US assets” and able to fund Chinese companies in need of offshore lending, he said. “It’s significant that this inflow isn’t primarily going into the Treasury market. But it is still mostly in dollars — and it should make the state commercial banks even bigger players in a host of dollar funding markets.”

Unlike official reserves, which are managed with a long-term mandate for returns and stability, the private sector’s foreign-exchange hoard is driven more by market sentiment.

If the yuan’s appreciation accelerates or China’s interest rates begin to increase, these investors may pivot in unison, rushing to repatriate their offshore dollar holdings to lock in gains.

That would create the risk of a feedback loop where any massive surge in demand for the yuan could cause the currency to spike, resulting in even more inflows into the domestic system, fueling sharper appreciation and inflating asset bubbles.

The PBOC seems to be aware of the threat and has been pacing gains in the yuan cautiously. But that strategy may lay the ground for even wilder volatility ahead, said Stephen Jen, chief executive of Eurizon SLJ Capital. He’s long been warning China’s foreign-exchange stockpile offshore could lead to an “avalanche” that may jolt the market.

For the rest of the world, a rapid homecoming of these funds could translate into a sudden withdrawal of liquidity, potentially sparking a sharp sell-off in risk assets and a spike in global borrowing costs.

“We are saying that currency stability today can lead to very large currency volatility tomorrow,” said Jen. “As the pool of these dollars rises over time, the risk of large and sudden repatriations also rises.”

Looking ahead, a continued rise in China’s trade surplus may mean even more non-official foreign assets spreading through global markets.

“China’s trade surplus is likely to remain high in coming years, given the competitiveness of its manufacturing sector,” said Louis Kuijs, chief Asia-Pacific economist at S&P Global Ratings. “Financial outflows are also likely to be large, amid the lackluster domestic economy and enthusiasm for foreign assets.”