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Yuan slide does China more harm than good

Business | Bloomberg, Reuters and Tereza Cai May 21, 2019
<p>The yuan, already battered by the US trade dispute, will do more harm than good to China if it weakens further to break 7 against the greenback, according to former central bank official Sheng Songcheng.</p><p>The currency will soon have a catalyst for further depreciation when offshore-listed Chinese companies will sell the yuan to buy foreign currencies and fund their US$18.8 billion (HK$146 billion) dividend bill due from June to August, Bloomberg reports.</p><p>Sheng explained that if the yuan weakens past the key 7-per-dollar level, it would have significant impact on the market confidence and lead to more pressure from capital outflows..</p><p>The offshore yuan has fallen almost 3 percent this month, making it the worst performing currency in Asia, and the onshore yuan broke the 6.9 level on Friday for the first time this year. The yuan&#39;s recent slide risks reigniting one of US President Donald Trump&#39;s favorite criticisms of China: that Beijing weakens its currency to aid exporters.</p><p>While analysts say the exchange rate is being driven by souring market sentiment as China&#39;s economy slows and the US ramps up tariffs, the slide towards 7 against the dollar comes during crunch trade negotiations.</p><p>Sheng said that letting the yuan depreciate would make it hard to incentivise mainland companies to improve the product quality and core competitiveness.</p><p>Although a weaker yuan would support Chinese exporters, the decline would need to be significant to offset the impact of higher US tariffs. Such a fall could, in turn, fuel capital flight and undermine China&#39;s economic stability, policy insiders said.</p><p>The source told Reuters that China&#39;s issue of central bank bills in Hong Kong this week was a clear indication the People&#39;s Bank of China&#39;s wanted to soak up offshore yuan to discourage investors from short-selling it.</p><p>The midpoint of yuan set by the central bank fell by 129 basis points to a five-month low at 6.8988 against a US dollar. The onshore yuan was 6.9141 against a US dollar yesterday, down 3 basis points, with the intraday fluctuation of 219 basis points.</p><p>Meanwhile Bloomberg said that the peak for Chinese firms&#39; dividend payouts will come in July, when companies hand out US$9.9 billion to shareholders.</p><p>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.</p><p>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 will pay US$2.1 billion, according to Bloomberg calculations based on exchange filings</p>


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