The yuan’s rebound might be undermined by a seasonal hunt for US dollars as Chinese companies prepare to pay dividends to shareholders overseas.
Demand for the greenback and other currencies is set to peak at US$7.8 billion this month, a substantial sum considering that local lenders settled an average of US$11.8 billion of foreign exchange for clients in the first five months of the year.
China’s currency reserves have shrunk every July in the past three years, with former regulator Guan Tao (管濤) 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 last month before suspected central bank intervention spurred a rally.
Goldman Sachs Group Inc warned that capital outflows have picked up, while 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,” Hong Kong-based Banco Bilbao Vizcaya Argentaria SA economist Xia Le (夏樂) said. “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 currency in the three months through next month, according to data compiled by Bloomberg.
That includes US$2.4 billion last month and US$5.9 billion next month.
Hong Kong-listed China Construction Bank Corp (中國建設銀行) needs to pay the equivalent of US$3.8 billion of dividends on July 20, according to a stock exchange filing.
Bank of China Ltd (中國銀行) is to pay US$1.9 billion and China Shenhua Energy Co (神華能源) US$1.2 billion, both next month.
The yuan started last month at an annual high and then lost 0.6 percent to the US dollar over two weeks as bearish bets returned on concern China’s economic growth might have peaked. The currency then surged amid speculation of central bank intervention, erasing its losses for the month to rise 0.6 percent in Asia’s best performance of last month.
“We are heading back to a test of 7 per [US] dollar soon, because fundamentals are bad, “ Hong Kong-based Rabobank Group head of financial markets research Michael Every said. “China has structural outflows and it always will, as long as people want to diversify and it keeps credit growing so fast.”
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