China Inc's US$7.8b of dividend payouts to stress Yuan

[BEIJING] The yuan's rebound may be undermined by a seasonal hunt for dollars as Chinese companies prepare to pay dividends to shareholders overseas.

Demand for the greenback and other currencies will peak at US$7.8 billion in July, a substantial sum considering that local lenders settled an average of US$11.8 billion in foreign-exchange for clients in the first five months of 2017.

China's currency reserves have shrunk every July in the last three years, with former regulator Guan Tao saying last week that demand for foreign-exchange surges in this period.

China's exchange rate has turned more volatile in the past two months, climbing the most in more than a year in May and then declining in June before suspected central bank intervention spurred a rally.

Goldman Sachs Group Inc. warned capital outflows have picked up, while recent data suggest the economy is showing signs of slowing as an official deleveraging drive crimps spending.

"The need for dividend payouts will pressure the yuan and may pressure a recent increase in China's foreign reserves," said Xia Le, a Hong Kong-based economist at Banco Bilbao Vizcaya Argentaria SA.

"The yuan's advance in the past few days is not sustainable - short-term factors such as dividend payments and long-term ones like capital outflows will work together to push the currency weaker in the coming months."

Offshore-listed Chinese firms need to pay a combined US$16 billion of dividends in foreign exchange in the three months through August, according to data compiled by Bloomberg. That includes US$2.4 billion in June and US$5.9 billion for August.

Hong Kong-listed China Construction Bank Corp will need to pay the equivalent of US$3.8 billion of dividends on July 20, according to a stock exchange filing. Bank of China Ltd. will pay US$1.9 billion and China Shenhua Energy Co. will shell out US$1.2 billion, both in August.

The yuan started June at a 2017 high, and then lost 0.6 per cent to the US dollar over two weeks as bearish bets returned on concern China's economic growth may have peaked. The currency then surged amid speculation of central bank intervention, erasing its losses for the month to rise 0.6 per cent in Asia's best performance for June. The onshore yuan fell 0.06 per cent to 6.7860 per US dollar as of 10.09am in Shanghai on Monday.

"We are heading back to a test of 7 per dollar soon, because fundamentals are bad, " said Michael Every, head of financial markets research at Rabobank Group in Hong Kong.

"China has structural outflows and it always will, as long as people want to diversify and it keeps credit growing so fast."

BLOOMBERG