Yuan gains slightly, seen continuing to track dollar index

SHANGHAI, Jan 22 (Reuters) - The Chinese yuan gained incrementally on Tuesday morning after the central bank kept its official midpoint almost flat to reflect small movement of the dollar in global markets. Traders said that both market players and regulators at the People's Bank of China (PBOC) are focused on tracking trends in the dollar index, given the absence of market-moving domestic factors. Spot yuan was trading at 6.2204 at midday, only 9 pips stronger than Monday's close of 6.2213. Traders said banks and their clients were largely comfortable with the current level of the dollar/yuan rate. Trading volumes continued to slow in morning trade, continuing a trend that began last Wednesday. Volume came in at $4.7 billion by midday, down from $5.6 billion during Monday's morning session.

The onshore spot market at a glance:

Item Current Previous Pct change

close

PBOC midpoint 6.2796 6.2790 -0.01 Spot yuan 6.2204 6.2213 -0.01 Divergence from midpoint 0.94

(pct)*

Spot change ytd (pct) 0.16 Spot change since 2005 33.05

revaluation (pct)

* The People's Bank of China (PBOC) allows the exchange rate to rise or fall 1 percent from the official midpoint rate it sets each morning.

OFFSHORE CNH MARKET Offshore markets stayed nearly flat, with offshore spot continuing to trade at a premium to the onshore spot and

one-year non-deliverable forwards trading nearly at

par with the midpoint.

The offshore yuan market at a glance:

Instrument Current Difference from onshore Offshore spot yuan 6.1975 0.37

(pct)

Offshore 6.2785 0.02

non-deliverable forwards (pct)

* The difference between offshore spot and the onshore spot

** Offshore one-year non-deliverable forwards (NDFs) reflect market expectations for appreciation or depreciation of PBOC's official midpoint.

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MARKET DRIVERS -- Forces underpinning yuan rally to lose steam in 2013

-- Offshore yuan premium returns as market bets on appreciation -- Spot yuan has rallied strongly since late July 2012, and the PBOC is using its daily midpoint to restrain further appreciation. 1/8Graphic: http://link.reuters.com/pyx74t 3/8 -- China's trade surplus surged in late 2012, but the surge was mainly due to weak imports rather than strong exports. Graphic: http://link.reuters.com/qav68s 3/8 -- Corporate yuan purchases still exceed dollar purchases, but the gap is narrowing. Exporters are converting progressively smaller portions of their foreign exchange receipts into yuan. 1/8http://link.reuters.com/syx74t 3/8 -- Hot money outflows may be putting downward pressure on the yuan. 1/8Graphic: http://link.reuters.com/saz74t 3/8 -- Despite relatively stable dollar/yuan exchange rate, the yuan is appreciating on a trade-weighted basis. 1/8Graphic: http://link.reuters.com/sed74t 3/8

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(Reporting by Lu Jianxin and Pete Sweeney; Editing by Richard Borsuk)