The Chinese yuan is performing well currently, but this may change in the future, even if the People's Bank of China refrains from taking further steps to temper its appreciation. It may be challenging for the currency to continue its ascent as seasonal profit payments from Chinese companies listed on the Hong Kong Stock Exchange are expected to swell, and the yuan may also come under pressure as the dollar receives a boost from the increasing debate among Federal Reserve officials regarding the timing of reducing the stimulus.
The debate around the future of the yuan centers on the role of the People's Bank of China, after authorities raised foreign exchange reserve requirements and unleashed a tide of data verifying the currency's gains. The increasing hurdles will bolster the strength of the central bank, which is trying to rein in the currency while adhering to its goal of further moving the forex market.
Chi Lo, Chief Economist for Greater China at BNP Paribas Asset Management in Hong Kong, stated, "The strength of the yuan has peaked." The yuan is expected to trade in a range of 6.4 to 6.6 per dollar this year, indicating a 3% decline from current levels.
**Superior Currency**
Last week, the yuan rose to its highest level in five years against a basket of trading partner currencies, supported by inflows into stocks and bonds, alongside improved economic forecasts, outperforming most of its Asian peers this quarter. Conversely, gains might have tapered off for now, with the currency dropping by 0.4% last Thursday, and the situation scarcely changing at 6.4063 in Asia by Friday afternoon.
The China Securities Journal reported on its front page, citing unnamed analysts, that expectations of a "one-way" appreciation of the yuan diminished following the recent correction. Simultaneously, Chinese companies listed in Hong Kong are expected to pay out around $16.8 billion in June, an increase of approximately $10 billion from the previous month, according to Bloomberg's calculations based on corporate filings. Additionally, a total of $50.6 billion in dividends is likely to be converted in July and August, meaning that the impact of companies exchanging yuan for Hong Kong dollars over the three months starting in June will be the highest this year.
It is unlikely that the dividend season will lead to a significant drop in the currency, as not all companies need to sell yuan in the spot market for Hong Kong dollars; some may prefer to already hold yuan and use it for dividend payments. Furthermore, foreign funds will continue to flock to Chinese bonds, especially with the anticipated inclusion of securities in the main FTSE index, providing another source of support for the yuan.
**Trade Dispute**
Currently, trade tensions could pose another risk to the yuan. President Joe Biden signed an order last Thursday to modify the ban on U.S. investment in Chinese companies, a measure that originated with his predecessor, targeting 59 companies with ties to the Chinese military or in the surveillance industry.
The currency could also face pressure from the southern platform of the current bond trading link between China and Hong Kong, which is expected to commence operations soon. Joe Wang, Senior Currency Analyst at HSBC Holdings, mentioned, "Over time, investors in Southbound Bond Connect will convert local yuan to Hong Kong dollars and other foreign currencies for investment. Initially, eligible banks can use their foreign currency deposits available for lending and portfolio investments."
These moves come at a time when Beijing has raised the investment quota for local traders to buy foreign securities again at the end of May, paving the way for increased foreign inflows. The impact of the dollar will also be crucial, after the yuan reached a three-year high against the dollar last week. Speculation is increasing that the Federal Reserve might begin to taper its bond-buying program this year—a move that would bolster the U.S. currency—especially as the U.S. economic recovery gains momentum.
