Yuan edges up on corporate dollar sales, upside limited
* Corporate sell dollars retained at end of July
* Driven by LDR reference rates in new rules in May
* PBOC shows intention of keeping yuan stable
* Yuan seen continuing directionless trade in near term
SHANGHAI, Aug 1 (Reuters) - The Chinese yuan edged higher on Thursday, driven by banks selling off dollars they had been compelled to retain through the end of July to meet new regulatory requirements, traders said. Spot yuan changed hands at 6.1264 per dollar near midday, 0.04 percent stronger than Wednesday's close of 6.1289. In new rules announced in May and implemented at the end of June, China's foreign exchange regulator set stricter limits for banks' open positions to curb speculative hot money inflows into China disguised as foreign trade. Banks whose foreign-currency loan-to-deposit ratio (LDR) exceeds the reference rate of 75 percent for Chinese banks and 100 percent for foreign banks are subject to more restrictions, making it worthwhile for them to stock up on foreign exchange toward the end of the month, and offload at the start of the next month. "The new LDR-related position limits push banks to keep more dollars on hand than they may want at the end of a month," said a dealer at a Chinese commercial bank in Shanghai. "They sell the unwanted dollars in the first one or two days of a month," he said. "Going forward, the new policy will support the yuan slightly at the start of the month, but any rally based on that cycle will not last." A dealer at a European bank said the yuan market has lost direction because the central bank's midpoint settings have not given a firm guidance. The People's Bank of China (PBOC) set its official midpoint at 6.1778 on Thursday, little changed from Wednesday's 6.1788. Dealers predict the yuan will move in a tight range between 6.13/14 in the near term, as the government moves to hold the currency relatively stable in order to avoid undermining export competitiveness as China's economic growth slows. The world's second-largest economy expanded at an annual rate of 7.5 percent in the second quarter, down from 7.7 percent in the first quarter.
The onshore spot yuan market at a glance:
Item Current Previous Change (pct) PBOC midpoint 6.1778 6.1788 +0.02 Spot yuan 6.1267 6.1289 +0.04
Divergence from midpoint* -0.83 (pct)
Spot change ytd +1.70 Spot change since 2005 revaluation +35.10
*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
The offshore yuan market at a glance:
Instrument Current Difference from onshore
Offshore spot yuan 6.1293 -0.05* Offshore non-deliverable 6.2953 -1.87**
*Premium for offshore spot over onshore
**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. .
RECENT DEVELOPMENTS - CHINA MONEY-Faltering exports could mean flat yuan or worse in H2 - Yuan rally starts to fade as capital inflows to China slow
- ANALYSIS-Bullish yuan herd leaves China fundamentals in the dust - Currency war or no, Beijing doesn't want Asia to take stable yuan for granted - China opens new front in money war as yuan speculation distorts export data
KEY DATA POINTS - Gap between PBOC midpoint and spot rate is narrowing. GRAPHIC: http://link.reuters.com/qyx74t - China's trade surpluses mainly driven by weak imports rather than strong exports. GRAPHIC: http://link.reuters.com/qav68s - Corporate FX purchases in May show reduction in yuan appreciation expectations. GRAPHIC: http://link.reuters.com/tyx74t - Hot money inflows turn to outflows in May 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
(Editing by Simon Cameron-Moore)