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China's yuan edges up; plenum neglects to specify currency reform

Lu Jianxin and Pete Sweeney
Wednesday, 13 Nov 2013 | 12:01 AM ET

* C.bank uses midpoint to signal stable yuan intention

* Party plenum has only one reference to financial reforms

* Dollar supply keeps yuan under appreciation pressure

* But yuan seen moving narrowly until fresh PBOC signals

SHANGHAI, Nov 12 (Reuters) - China's yuan edged higher against the dollar on Wednesday after the central bank set a slightly stronger midpoint, while traders said the communique issued after a key ruling Communist Party meeting did not have any impact on trading. Chinese leaders pledged to let markets play a "decisive" role in the economy as they unveiled a reform agenda for the next decade on Tuesday, the Party said in a communique released at the end of a four-day conclave of its 205-member Central Committee. But the communique mentioned financial reforms only once and indirectly, stating that the government would "perfect financial market mechanisms", to the disappointment of the market, traders said. "There is really nothing to be excited on the currency market's side from the communique," said a dealer at a European bank in Shanghai. "The market will have to wait and see whether the central bank will follow through with details of financial reforms based on the general principles of the communique, so the yuan will stick to its established style of movements for now." Spot yuan traded at 6.0911 per dollar near midday, up 0.01 percent from Tuesday's close of 6.0919. The People's Bank of China (PBOC) fixed Wednesday's midpoint at 6.1342, or 0.03 percent stronger than the previous day's 6.1360. Traders said China's enduring sizeable trade surpluses have ensured robust dollar supply in the domestic foreign exchange market, keeping the yuan under appreciation pressure. But the market has been suppressed by the PBOC's guidance for price quotes and by state-owned banks which are continuously buying excessive dollars in the market, traders said, adding they believe these purchases are being conducted on the behest of the regulator. Traders said the yuan was likely to continue moving narrowly between 6.09 to 6.10 for now, awaiting the central bank's cues for another round of yuan rises, which traders said they expected in the second half of December. The central bank has controlled the pace of yuan rises since the currency's landmark revaluation in 2005, letting it mainly appreciate during major political events, such as Chinese leaders' visits to the United States or participation in global events, while maintaining stability at other times.

The onshore spot yuan market at a glance:

Item Current Previous Change PBOC midpoint 6.1342 6.1360 +0.03% Spot yuan 6.0911 6.0919 +0.01% Divergence from midpoint* -0.70% Spot change ytd 2.29% Spot change since 2005 revaluation 35.88%

*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 the 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 6.0793 +0.19% Offshore non-deliverable 6.1575 -0.38%**

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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RECENT DEVELOPMENTS - CHINA MONEY - PBOC hopes to drain sloppy money without raising primary rates as growth revives - ANALYSIS-Rally in tightly managed yuan shows China leery of FX reform - CHINA MONEY - PBOC preparing market for more yuan volatility - ANALYSIS-Bullish yuan herd leaves China fundamentals in the dust. - CHINA MONEY - Currency war or no, Beijing doesn't want Asia to take stable.

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 July show reduction in yuan appreciation expectations. GRAPHIC: http://link.reuters.com/tyx74t - Hot money outflows reach record high in July 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)