Yuan Rally Seen Facing Summer Test Early as Record Payouts Loom

The yuan is likely to face its seasonal weakness sooner than usual this summer, say analysts, as Chinese firms seek to lock in favorable exchange rates ahead of a record dividend payout in June.

Mainland firms listed in Hong Kong have announced shareholder payouts totaling nearly $70 billion over the next few months, according to Bloomberg calculations. The peak comes in June, when dividends are estimated to reach $24.1 billion — a record for the month. That will be followed by $15.4 billion in July and $19.5 billion in August.

While companies typically convert yuan into Hong Kong dollars closer to payout dates, this time they have two incentives to lock in prices sooner: a regulatory change has lowered the cost of currency purchases, and forward rates are cheaper than the spot market. Combined, these factors may bring the seasonal pressure on the currency up by several weeks.

Getting in early will also allow the companies to lock in favorable rates after the yuan hit its strongest level against the dollar in more than three years this month, as China’s and showed resilience in the face of the energy shock triggered by Iran conflict. The People’s Bank of China has the currency’s advance.

The PBOC the reserve requirement of 20% on foreign-currency forward contracts from March 2, lowering the cost for market participants to bet against the yuan via derivative contracts with banks.

“After neutralizing the forward forex purchase risk reserve requirement, the PBOC has continued to maintain resilience in the yuan fixing, aiming to dampen expectations of further appreciation,” said Frank Zhang, founder of Nalan Advisory, an independent FX consultancy in Beijing. “Both measures serve to lower the cost of forex purchases, encouraging importers and dividend-related buyers to step in early.”

Most Chinese companies listed in Hong Kong earn revenue in yuan but pay dividends in the city’s currency. The US dollar is often used as an intermediary for conversions between the other two currencies, which means all three are affected by the transactions. The Hong Kong dollar is pegged to the greenback.

Over the past five years, the dollar has risen an average 0.7% against the yuan in June, with the Chinese currency weakening on four occasions. The yuan is projected to reach 6.85 per dollar by the end of June and 6.80 by the end of the year, according to the median forecasts of analysts in a Bloomberg survey . It traded near 6.83 as of 5 p.m. in Hong Kong on Tuesday.

“In this environment where there is little expectation for the yuan to weaken, this sort of seasonal impact could be rather tentative,” said Fiona Lim , senior FX strategist at Malayan Banking Berhad. “A pullback would be seen as opportunities for yuan dip buyers.”