Yuan slips but on track for 3rd straight weekly gain
* PBOC fixes a weaker official midpoint
* For the week, yuan up 0.2 pct against dollar
* Yuan outperforms all other Asian currencies this year
HONG KONG, Dec 13 (Reuters) - China's yuan edged down slightly against the dollar on Friday but was on track for a third week of solid gains, indicating renewed demand for the Chinese currency despite a weaker fixing by the central bank. While investors have dialed down appreciation expectations after a chunky 2.6 percent rise against the U.S. dollar this year, they are also bracing for more volatility next year, especially as the chances increase that the trading band will widen. Spot yuan traded at 6.0719 per dollar near midday, down 0.01 percent from Thursday's close of 6.0711. The People's Bank of China (PBOC) fixed the midpoint at 6.1148, down 0.05 percent from the previous day's 6.1115. For the week, the yuan has gained 0.2 percent. "It is normal for the yuan to consolidate after the rapid appreciation seen last week. The trend is still for the currency to go up, but no longer a one-way move," said a trader at a Chinese bank in Shanghai. In a sign that the yuan may be in for period of consolidation, the offshore yuan traded in Hong Kong began to reverse its premiums of more than 300 pips in late November over its onshore cousin and flipped to a discount of nearly 50 pips, a five-month high. The "redback" remains a regional bright spot and is the sole gainer apart from the Korean won in Asia this year. It has appreciated 36 percent since the landmark revaluation in July 2005. Demand for the yuan has been whetted by an ambitious reform blueprint unveiled last month and steadily rising bond yields in the onshore market, which have sparked hot money inflows via the fake trade invoicing route. China's determination to reform its domestic financial system and allow freer cross-border money flows has encouraged global funds to enter the world's second-largest economy for higher-yield yuan assets. Yield levels in different Chinese debt instruments have reached record highs recently, which saw the spread of 10-year government bonds in China and the United States hovering around two-year highs. Traders say the PBOC seemed to have stopped intervening through big state-owned banks this week and the market is dominated by profit-taking activity and arbitrage of volatile onshore and offshore yuan rates. With authorities pressing ahead with their agenda to liberalise capital markets and some analysts such as Deutsche Bank believing basic convertibility may be achieved around 2017, higher yields in China and corporate flows will remain a key driver for the currency in coming months.
The onshore spot yuan market at a glance:
Item Current Previous Change PBOC midpoint 6.1148 6.1115 -0.05% Spot yuan 6.0719 6.0711 -0.01% Divergence from midpoint* -0.70% Spot change ytd 2.61% Spot change since 2005 revaluation 36.31%
*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 6.0758 -0.06%* Offshore non-deliverable 6.1325 -0.29%**
*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 - Hot money distorts China's exports as speculators seek to cash in on yuan, rate reforms - China central bank suggests faster tempo for freeing yuan
- China investors face bumpy ride as reform speculation intensifies - CHINA MONEY - PBOC preparing market for more yuan volatility
KEY DATA POINTS - Hot money returned to China in Sept, Oct after two months of outflows GRAPHIC: http://link.reuters.com/saz74t - China's trade surpluses mainly driven by weak imports rather than strong exports. GRAPHIC: http://link.reuters.com/qav68s - Corporate FX behavior reflects yuan appreciation expectations. GRAPHIC: http://link.reuters.com/tyx74t - Despite relatively stable dollar/yuan exchange rate, the yuan is appreciating on a trade-weighted basis. GRAPHIC: http://link.reuters.com/sed74t
(Editing by Richard Borsuk)