Rebound of China’s Yuan Is Facing a $68 Billion Roadblock

Having rebounded from its worst month since 2019, China’s yuan is facing a new wave of selling pressure as hundreds of companies prepare to exchange the currency to pay dividends.

Chinese firms listed in Hong Kong are expected to pay nearly $68 billion in dividends this year, which would be nearly 17% higher than 2020’s amount. That means they’ll step up swapping the yuan for the city’s dollars in coming months.

This comes after the yuan rebounded about 0.4% from March’s 1.3% drop, when risk assets were sold off due to a spike in Treasury yields. The payout season, which starts to gather steam this month and is expected to peak in August, will further suppress the currency, in addition to strength in the dollar and a narrowing yield premium over the rest of the world. On top of that, uncertainty over China-U.S. tensions is continuing to hurt sentiment.

Rebound of China’s Yuan Is Facing a $68 Billion Roadblock

“Dividend outflows add pressure on the yuan, against the background of brewing U.S.-China tensions.,” said Trang Thuy Le, Asia currency strategist at Macquarie Capital Ltd. in Hong Kong, adding that discussions on the Federal Reserve starting to taper policy could strengthen the greenback in the fourth quarter. “The dollar-yuan rate should largely mirror that path.”

More than 400 companies will hand out $65 billion of dividends from April to September alone, with the payment reaching a peak in August at $21 billion, according to data compiled by Bloomberg.

Firms are paying more to shareholders in part because they have excess idle cash as they refrain from expansion, and also as they hope to retain investors.

To be sure, it’s unlikely the dividend season would lead to any dramatic slide in the currency. That’s because not all of the companies need to sell the yuan in the spot market for the Hong Kong dollar, which they may already own and can be used for dividend payments. Also, the People’s Bank of China won’t likely allow any sharp depreciation, as that may hinder its push to attract foreign inflows and promote the yuan’s global usage.

Also, the dollar remains the biggest driver of yuan moves nowadays. Even though banks helped clients sell the currency during last year’s payout season, it gained during the summer amid drops in the greenback.

A beneficiary of the move, of course, is the Hong Kong dollar. The currency, which this month fell to a one-year low, will see stronger demand in the coming months. It inched higher to 7.77 per dollar Monday while the onshore yuan fell 0.1% to 6.5256.

The largest single sum of dividend payment will hit on Aug. 5, when China Construction Bank Corp. hands $12 billion to its shareholders. And on May 20, China Mobile Ltd. will give out $4.6 billion.

©2021 Bloomberg L.P.

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