A US$19b test is coming straight for China's battered yuan

Hong Kong

CHINA'S yuan, already battered by the US trade dispute, will soon have a catalyst for further depreciation.

Offshore-listed Chinese companies will sell the yuan to buy foreign currencies and fund their US$18.8 billion dividend bill due from June to August, according to Bloomberg calculations.

While that's less than last year's US$19.6 billion, the payments come at a sensitive time: the yuan is at its weakest this year and speculation is mounting that it will fall to 7 per dollar, regarded as a key psychological level.

The offshore yuan has already dropped about 2.9 per cent in May as one of the world's worst-performing currencies.

The spat with the US has put the yuan under pressure because it is likely to hurt China's economic growth and narrow its trade surplus, while there's also the possibility that the central bank will weaken the currency to offset the blow from tariffs.

The US increased levies on Chinese imports on May 10 and has threatened more.

"The yuan will face seasonal depreciation pressures," said Tommy Ong, managing director for treasury and markets at DBS Hong Kong Ltd.

"But a more important driver for the exchange rate is the trade talks. The currency may weaken towards 7 amid the negotiations, but won't break that level as that would agitate the US."

The peak for dividend payouts will come in July, when Chinese companies hand out US$9.9 billion to shareholders.

Pressure on the yuan could build before then as firms buy foreign-exchange to prepare themselves, though they might not need to if they already hold dollar reserves offshore.

Hong Kong-listed banks are among the biggest payers.

China Construction Bank Corp will hand out US$4.2 billion in July, and Bank of China Ltd will pay US$2.1 billion, according to Bloomberg calculations based on exchange filings.

Beijing has moved to support the yuan, with the People's Bank of China setting its daily reference rate at a level that's stronger than analysts and traders projected on Monday.

The offshore yuan gained 0.17 per cent to 6.9371 as at 11am in Hong Kong, after touching as low as 6.9514 earlier in the day. The onshore rate gained 0.13 per cent.

Foreign inflows to onshore stocks and bonds due to index inclusion could help to partly offset the pressure that dividend payouts place on the yuan, said Alan Yip, a senior foreign-exchange strategist at Bank of East Asia Ltd.

But the currency may still slide to as weak as 6.98 per dollar because of the trade war, he said.

Foreign investors' holdings of onshore stocks and bonds stood at 3.5 trillion yuan (S$696.5 billion) at the end of March, a 37 per cent surge from a year earlier, according to official data.

That figure is set to grow as MSCI Inc adds more A shares to its gauges and after yuan bonds started to get included in a major global index in April. BLOOMBERG