Yuan close highest since Jan as companies bet on appreciation
* Yuan closes at strongest level since Jan at 6.2181/dlr
* Corporate conversion trends show appreciation expectations
* But traders uncertain if PBOC will allow stronger yuan
* Stabilisation of JPY may persuade PBOC to loosen reins
(Updates to close) SHANGHAI, March 6 (Reuters) - China's yuan closed higher on Wednesday boosted by strong client demand as recent data boosted expectations that the Chinese currency will appreciate in coming weeks. Chinese banks purchased a record net 683.7 billion yuan ($109.90 billion) of foreign exchange in January, data on Tuesday afternoon showed. Spot yuan closed at 6.2181 per dollar on Wednesday, a gain of 0.05 percent over Tuesday's close and its strongest closing level since Jan. 23. Tuesday's data, which includes purchases by the PBOC, follows figures released on Monday which showed Chinese commercial banks purchased a net $92.6 billion in foreign exchange on behalf of clients in January. Taken together, the heavy forex purchases signal increased corporate demand for yuan as well as possible intervention by authorities to restrain yuan appreciation. Previously, traders had identified 6.22/dollar as a resistance level for the yuan, but a series of stronger midpoint settings by the central bank since the end of the Lunar New Year holiday has allowed the spot rate to strengthen beyond that level. The People's Bank of China (PBOC) typically sets its daily midpoint stronger when the dollar falls against major currencies in global markets, as it has this week. The apparent stabilisation of the Japanese yen after a three-month bout of depreciation has also given the PBOC more leeway to permit yuan appreciation. Traders say the strong forex purchase data has also persuaded clients that the risk of yuan depreciation - which pushed the yuan weaker for much of 2012 - is now low and increased clients' appetite for the Chinese currency. Indeed, a comparison of monthly import and export data to the figures on bank forex purchases from client shows that exporters are increasing the proportion of their forex receipts that they convert into yuan, while importers are decreasing the proportion of their import payments that they are converting into foreign currency. (GRAPHIC: http://link.reuters.com/syx74t) Market players are uncertain about whether the yuan has significant space to strengthen further. Despite strong market demand for yuan, the PBOC's midpoints will determine whether appreciation pressure is allowed to express itself in the market. Traders say if the midpoint breaks below 6.27, it would send a clear signal to the market that the PBOC is prepared to tolerate substantial appreciation. Trading volume on Wednesday was slightly below average but still healthy at $12.7 billion.
The onshore spot yuan market at a glance:
Item Current Previous Change
PBOC midpoint 6.2745 6.2797 +0.08 Spot yuan 6.2181 6.2209 +0.05
Divergence from midpoint* -0.93
Spot change ytd +0.20 Spot change since 2005 revaluation +33.10
*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 In the Hong Kong market, the premium between the offshore yuan CNH=D3 and the onshore yuan had widened slightly by later afternoon on Wednesday, but the two rates remain close to parity, as offshore investors appear unwilling to take a strong position on the exchange rate's future course. The one-year non-deliverable forward contract CNY1YNDFOR=, considered an imperfect indicator of expectations, continues to trade at prices implying depreciation over the next twelve months.
The offshore yuan market at a glance:
Instrument Current Difference from
Offshore spot yuan 6.2107 *0.12Offshore non-deliverable 6.3160 **-0.66
*Premium for offshore spot over onshore
**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. .
MARKET DRIVERS - China eyes market forces to drive FX reform
- Bank of China extends yuan deposits to promote redback's rise - Taiwan yuan bonds may be dogged by policy barriers
- China restrains yuan rise in response to Asian currency weakness - 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
DATA POINTS - 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 in recent months reflect strong yuan appreciation expectations. GRAPHIC: http://link.reuters.com/syx74t
- Hot money inflows, which should support yuan appreciation, returned in Jan following nine straight months of outflows. GRAPHIC: http://link.reuters.com/raz74t - Despite relatively stable dollar/yuan exchange rate, the yuan is appreciating on a trade-weighted basis. GRAPHIC: http://link.reuters.com/sed74t
($1 = 6.2209 Chinese yuan)
(Editing by Kim Coghill)