Yuan hits 4-week low, c.bank wary of Asian currency weakness

* Yuan down 0.11 pct at 6.2255/dollar at midday

* Corporate yuan demand still strong - traders

* But PBOC restrains appreciation as Asian currencies weaken

* Stability expected through Lunar New Year

SHANGHAI, Feb 1 (Reuters) - China's yuan touched a nearly four-week low on Friday as the central bank set another soft fixing Of its official midpoint in response to weakness in the yen and other Asian currencies. Traders say corporate yuan demand is strong but the central bank is using its daily midpoint to restrain appreciation and blunt the impact on Chinese exports from recent devaluation by Asian neighbours. The yen plumbed fresh multi-year lows against its G3 peers on Friday, having posted its biggest monthly decline in 12 years versus the euro as the market positioned for more aggressive easing from the Bank of Japan. The yuan hit an intra-day low of 6.2296 per dollar in late morning but had recovered to 6.2255 at midday, 0.11 percent softer than Thursday's close. The dollar index has fallen this week, driven by strength in the euro. The People's Bank of China (PBOC) has traditionally set stronger yuan fixings in response to a decline in the index. But traders say the PBOC is now focused on the yen and other Asian currencies such as the Korean won and Singapore dollar, which carry little weight in the dollar index. The won also touched a three-month low this week.

In addition to the impact of the midpoint, traders also suspect that the PBOC continues to conduct small-scale market interventions in the form of dollar purchases. A trader at a city commercial bank in Shanghai estimated the size of PBOC's daily interventions at around $1 billion, though he cautioned this was a rough estimate. That compares to an average of about $17 billion in daily trading volume over the last two weeks. Traders generally expect the yuan to hold steady through the Lunar New Year holiday. China's interbank FX market will be closed from Feb. 9 to 15. Traders say appreciation pressure from strong corporate demand is likely to continue, as many companies still have long dollar positions to unload. But whether authorities allow that pressure to express itself depends on whether the so-called "currency war" ramps up.

The onshore spot yuan market at a glance:

Item Current Previous Change

(pct)

PBOC midpoint 6.2819 6.2795 -0.04 Spot yuan 6.2255 6.2188 -0.11 Divergence from midpoint* -0.90 Spot change ytd +0.08 Spot change since 2005 +32.95

revaluation

*Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 1 percent from official midpoint rate it sets each morning.

OFFSHORE CNH MARKET

The offshore yuan market at a glance:

Instrument Current Difference from

onshore (pct)

Offshore spot yuan 6.2155 +0.16*Offshore non-deliverable 6.313 -0.50**

forwards

*Premium for offshore spot over onshore

**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. .

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

- Spot yuan has rallied strongly since late July 2012, and the PBOC is using its daily midpoint to restrain further appreciation. GRAPHIC: http://link.reuters.com/pyx74t - 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 - 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. GRAPHIC: http://link.reuters.com/syx74t - Hot money outflows may be putting downward pressure on the yuan. GRAPHIC: http://link.reuters.com/saz74t - Despite relatively stable dollar/yuan exchange rate, the yuan is appreciating on a trade-weighted basis. GRAPHIC: http://link.reuters.com/sed74t

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(Editing by Jacqueline Wong)