Winni Zhou, Tom Westbrook

SHANGHAI/SINGAPORE – The COVID-19 lockdown in Shanghai is causing havoc with companies’ paperwork for dividend payments. Bankers claim it’s preventing summertime dollars buying because some banks are unable collect signatures from firms and seals necessary to process FX contracts.

Chinese companies listed offshore often have to purchase dollars in order to pay their overseas shareholders. Typically, they start purchasing in May. Delays in this year’s auction will ease pressure on the Yuan, and traders believe it provides a buffer to prevent the currency falling even more quickly.

Although some payments can be taken from the company’s balance sheets, most must still go through banks in order to purchase foreign currency. Three banking sources stated that COVID-19 mobility restrictions in Shanghai (China’s financial hub and commercial center) were making it very complicated.

According to sources, companies usually report dividend payments to regulators. They also announce details about the plan in the relevant disclosures.

According to them, some corporate executives told banks that they couldn’t sign documents required by banks to process purchases or payments because the executives weren’t able to go to work.

One senior banker who was directly aware of the situation, but did not want to be identified because they weren’t authorized to talk about it publically, said that “Some companies had discussed this and asked banks for solutions”.

The executives also stated that while some had online access for corporate banking, not all did have official stamps.

China’s traditional practice of stamping documents using the red seal from the company gives legality to transactions and contracts.

The current jam was reminiscent of the 2020 lockdowns that forced western financial institutions to abandon face-toface business with Lloyds (LON) in London.

China has tightened its restrictions and is making them more severe. Although this is still early in the dividends season, the banks state that the dollar demand over the period of $70 billion (last year) is very low, when normal growth would have begun by May middle.

One foreign exchange banker said that “Paperwork appears to have stuck”.

SLOWDOWN

Nomura stated that 41 Chinese cities had been placed under lockdown by May 10. This was affecting almost 300 million Chinese citizens.

Shanghai placed 25 million people under lockdown on March 28. The city has been unable to resume normal business operations and is taking stringent measures to limit the spread of viruses.

Even if they are temporary, the delays in corporate foreign currency demand seem to be straining liquidity, reducing interbank trade volumes, and even creating a shortage of liquidity.

The yuan has fallen more than 6% against the dollar due to a rising greenback, and the uncertainty over China’s economy. This is the largest drop in four years.

“The FX buying process is becoming slower but dividend payments are still being paid,” said Xing Zhaopeng at ANZ, senior China strategist.

Official data indicates that dividends were paid by Chinese listed companies in Hong Kong to more than $70 Billion. Based on preliminary Refinitiv data, Reuters estimates that this volume could reach HK$680billion ($87billion) in 2021.

Although we don’t anticipate a significant increase in capital controls, Becky Liu (OTC) is the head of China macro strategy for Standard Chartered.

While a rising number of dividends will drive up the demand for dollars, China’s large FX reserves will provide an important cushion and help reduce the need to convert new currency.

($1 = 7.8499 Hong Kong dollars)