Yuan slips toward weekly loss, but seen stabilising
* Yuan seen edging up until early Sept, then stabilising
* Fed's QE reduction threatens capital outflow from China
* China will hold yuan stable to avoid fuelling outflows
* China commerce ministry optimistic about foreign trade
SHANGHAI, Aug 23 (Reuters) - China's yuan edged lower against the dollar on Friday, heading for its first weekly decline in five weeks, but traders said they expected the Chinese currency to largely remain stable in the medium term. Spot yuan changed hands around 6.1217 per dollar near midday, down 0.01 percent from the previous close of 6.1211, after the People's Bank of China (PBOC) set its midpoint at 6.1710, or 0.02 percent weaker than Thursday. At its midday level, the yuan was down 0.11 percent for the week, breaking a string of four straight weeks of small gains. Traders said the yuan was likely to appreciate slightly through early September, then remain stable in the medium term. Authorities will try to hold the yuan stable in order to avoid fueling further capital outflows. China, like other emerging markets, has experienced capital outflows due to expectations that the U.S. Federal Reserve could begin to taper its quantitative easing (QE) programme soon. "The PBOC is believed to be taking counter measures to prevent possible capital outflows," said a dealer at a foreign bank in Shanghai. "So it is likely to keep the yuan stable in the medium term around 6.12 per dollar," he said. Supporting the outlook for a stable yuan, China's Ministry of Commerce said on Friday that there were signs that the country's trade flows were stabilising in early August, amid growing evidence that growth in the world's second-largest economy might have stabilised following a downturn earlier this year. On Thursday, the Flash HSBC Purchasing Managers' Index rose to 50.1 from July's final reading of 47.7, indicating that activity in China's vast manufacturing sector hit a four-month high due to a rebound in new orders, reinforcing signs of stabilisation in the economy. However, in a sign of possible capital outflow, the PBOC and commercial banks together sold 24.5 billion yuan ($4 billion) worth of foreign exchange on a net basis in July, central bank data issued on Tuesday showed. Banks had sold 41.2 billion yuan worth of foreign exchange in June. While the data does not directly reflect capital flows, it is one of several data points, including trade and foreign investment figures, that indicate China's cross-border fund flows. The PBOC launched a new phase of yuan appreciation two weeks ago, guiding the yuan to a slew of record highs since then, with an all-time peak of 6.1090 being hit last Friday. Despite this week's slight fall, traders said they believed the yuan was likely to retain its recent general uptrend until early September, when a G20 summit kicks off in Moscow. China has traditionally let the yuan appreciate ahead of major international political events in a gesture to trading partners who feel the yuan is undervalued.
The onshore spot yuan market at a glance:
Item Current Previous Change (pct) PBOC midpoint 6.1710 6.1698 -0.02 Spot yuan 6.1217 6.1211 -0.01
Divergence from midpoint* -0.80 (pct)
Spot change ytd +1.77 Spot change since 2005 revaluation +35.20
*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 6.1155 +0.10* Offshore non-deliverable 6.2470 -1.22**
*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 - PBOC's FX assets dropped in June, pointing to possible capital outflows: GRAPHIC: http://link.reuters.com/het22v - 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 Jacqueline Wong)