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China's yuan edges higher after record fixing

Saikat Chatterjee
Tuesday, 19 Nov 2013 | 10:50 PM ET

* Yuan gains tempered by large Chinese banks selling

* Offshore mkts more bullish on China reforms than onshore

* Gap between offshore and onshore yuan nears 2013 highs

HONG KONG, Nov 20 (Reuters) - The Chinese yuan rose on Wednesday after the central bank set the strongest midpoint fixing against the U.S. dollar since a landmark 2005 revaluation, though gains were checked by state-run banks selling the currency near the highs. The intervention by large Chinese lenders meant the spread between the yuan traded on the mainland and its counterpart in Hong Kong - a rough gauge of investor expectations towards the Chinese currency - widened further, nearing the year's highs. Foreign investors have cheered a 60-point reform plan to redraw China's economy and social fabric announced late last week, snapping up Chinese assets in Hong Kong and elsewhere. The China Enterprises Index of the top Chinese listings in Hong Kong was up more than 1 percent in early trades and turned positive for the year for the first time since March. In the currency markets, the Chinese yuan was changing hands at 6.0923 per dollar compared with 6.0927 at the last close after the People's Bank of China fixed the currency at a post-revaluation high of 6.1305. In comparison to the rangebound onshore currency markets, the Chinese currency hovered just below a record high of 6.0573 hit in intraday trades on Tuesday in Hong Kong. That meant the spread between the offshore and the onshore yuan gapped to more than 300 pips, nearing a 2013 high of nearly 400 pips in early January. Demand for the Chinese currency gained traction this week after the central bank chief Zhou Xiaochuan vowed to quicken the process of full yuan convertibility, which would allow the free movement of capital across China's borders.. Investors have taken the details of the reform plan and subsequent positive comments by policymakers as reasons to stampede into Chinese assets, but the relatively lacklustre reaction onshore and the difficulty of implementing some of these reforms have prompted caution from some quarters. While the authorities did a great job in delivering a comprehensive set of reforms, Bank of America Merrill Lynch analysts said some of the messages may conflict with each other, some goals were still too vague, some might be just intermediate steps towards a truly appropriate system for China, and some might not be effectively carried out. But that has not fazed investors. In the NDF markets, the spread between the one-year and the one-month yuan non-deliverable forwards collapsed to its lowest level this year as investors bet on more currency gains.

The onshore spot yuan market at a glance:

Item Current Previous Change PBOC midpoint 6.1305 6.1317 0.02% Spot yuan 6.0921 6.0927 0.01%

Divergence from midpoint* -0.63%

Spot change ytd 2.27% Spot change since 2005 revaluation 35.86% *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 6.0666 0.42% Offshore non-deliverable 6.1425 -0.20%

forwards

*Premium for offshore spot over onshore

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

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

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(Editing by Jacqueline Wong)