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China's yuan hits record high amid year-end trading distortions

Lu Jianxin and Gabriel Wildau
Friday, 27 Dec 2013 | 12:12 AM ET

* C.bank sets record high midpoint to top up 2013 yuan rise

* But upside limited as c.bank controls pace of gains

* Spot rate seen at 6.07/dlr by year-end, up 2.6 pct in 2013

* PBOC midpoint seen 6.1/dlor by year-end, up 3 pct in 2013

SHANGHAI, Dec 27 (Reuters) - China's yuan set a record high against the dollar on Friday in thin and volatile trade, with traders saying year-end factors have given rise to distortions in the exchange rate. "You see a much smaller number of people are doing business," said a trader at a Chinese commercial bank in Shanghai. "Corporates in urgent need of either yuan or dollars have to be more flexible in the rate to find trading partners, so quotes have shown wider swings since yesterday afternoon. The trend is likely to persist through the end of next week." Spot yuan moved in an unusually wide range on Friday, hitting a record high 6.0670 per dollar, well above the previous record high of 6.0702 hit on Monday. The currency changed hands at 6.0698 at midday, up from Thursday's close of 6.0746. The People's Bank of China (PBOC) set Friday's midpoint at a record high of 6.1050, up from Thursday's fix of 6.1156, a move that traders said may be intended to boost the yuan's calendar-year appreciation figure for 2013. Traders cautioned that a single-day all-time high midpoint did not represent a change in the central bank's policy to tightly control the pace of yuan appreciation. That grip meant the yuan would have limited potential to rise sharply in the near term. Despite year-end distortions, traders said they believed the exchange would end 2013 at around 6.07, while the PBOC's midpoint would end at around 6.1. That would mean full-year appreciation in the spot rate of 2.6 percent, while the midpoint would have risen 3 percent. Most market players believe that the PBOC has been setting unofficial yearly targets for the yuan since the currency's landmark revaluation in 2005, aimed at balancing international pressure for yuan appreciation and the needs of domestic exporters. Traders reckon the central bank has already achieved its target for 2013. In 2014, China's resilient trade surplus and hot money inflows will continue to support yuan appreciation, while the central bank continues using its daily midpoint to moderate the pace of yuan gains, traders say.

The onshore spot yuan market at a glance:

Item Current Previous Change (pct) PBOC midpoint 6.1050 6.1156 0.17 Spot yuan 6.0698 6.0746 0.08

Divergence from midpoint* -0.58 (pct)

Spot change ytd 2.64 Spot change since 2005 revaluation 36.36

*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

(pct)

Offshore spot yuan 6.0708 -0.02* Offshore non-deliverable 6.1360 -0.51**

forwards

*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

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(Editing by Shri Navaratnam)