China banks buy Treasuries on boost in dollar deposits, sources say

After paying the deposit rates of 3% to 4%, banks can earn income from Treasuries. The 10-year yield has risen more than 30 basis points since the start of June to 4.76%, on a combination of inflation and U.S. debt worries as well as an improved U.S. growth outlook.

"Essentially, domestic yields are too low, so banks need to attract dollar deposits to purchase U.S. Treasuries," said a separate banking source, saying lenders had been prodded into action by a "famine" of attractive safe assets to invest in.

The source said, however, that banks were reluctant to convert yuan to dollars themselves given recent regulatory scrutiny of offshore investments.

All sources were not authorised to speak publicly on the subject and declined to be identified.

The People's Bank of China (PBOC), the country's central bank, did not immediately respond to Reuters' faxed requests for comment.