Already-Weakened Yuan Set for $79 Billion of Dividend Pressure

Bloomberg News, Bloomberg News

, Bloomberg

(Bloomberg) -- A massive chunk of dividend payouts by Chinese companies is set to weigh on the already weakened yuan in coming months.

In the Hong Kong market, 500 listed companies have released plans to hand over 573.1 billion yuan ($79.2 billion) of dividends to their overseas investors this year. That’s the largest yuan total on record in data compiled by Bloomberg that goes back to 2016.

The payments will peak during June to August this year, according to the scheduled dates. As they involve converting yuan into Hong Kong dollars or other foreign currencies for payment, they’re likely to undermine efforts by the People’s Bank of China to stabilize the currency, which has weakened 2% versus the dollar year to date.

“Pressure on the yuan has already built up due to broad dollar strength, widening US-China yield gaps and signs that the PBOC may reduce its resistance to yuan depreciation,” said Trang Thuy Le, Asia FX strategist at Macquarie Capital Ltd. “Dividend outflow adds to the negative backdrop this summer and increases the risk of further yuan depreciation.”

Although the PBOC has been maintaining support for the yuan via relatively steady fixings, there are signs of growing distress. The onshore yuan has slumped to a six-month low and made a rare approach toward the edge of its allowed trading band.

Asian currencies including the yuan have struggled in recent months, as resilient US economic growth and inflation reduced the case for early rate cuts from the Federal Reserve and bolstered the greenback.

Given the weakness in the currency, Chinese policymakers might be tempted to take measures to lessen dividends’ effect on the yuan. However, that may be difficult, as there have been signs that some investors hurt by the earlier stock rout and current economic struggles are counting on dividend payouts as a key source of returns in both onshore and offshore markets.

“It is highly unlikely for the government to impose any formal measures to constrain dividend flows,” Macquarie’s Le said. “Although, there could be window guidance toward state-owned enterprises to utilize existing FX sources instead of converting yuan in local markets.”