Meyrick Chapman is the principal of Hedge Analytics and a former portfolio manager at Elliott Management.
The Federal Reserve is causing a fine mess in China. Driven by the rapid rise in US interest rates, Chinese banks are rapidly deleveraging their dollar balances.
To a large degree the fall in dollar holdings in China reflects the unwind of the global dollar carry trade. This strategy was in response to zero-interest rate policy from 2009 onwards and entailed borrowing low-interest currencies and lending higher interest currencies. A BIS paper from 2015 details how a version of this trade encouraged dollar-denominated debt issuance:
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