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Yuan flat, return to "hibernation" seen after string of record highs

Gabriel Wildau
Thursday, 2 Jan 2014 | 11:32 PM ET

* C.bank signals end to swift appreciation of late Dec

* String of four straight record highs set to end

* Yuan seen resuming measured pace of appreciation

* Yuan could rise by about 3 pct in 2014

SHANGHAI, Jan 3 (Reuters) - China's yuan eased on Friday after the central bank set a weaker fixing for the second straight day, signaling a pause in the sharp appreciation seen in the final days of 2013. The People's Bank of China (PBOC) set its daily yuan midpoint at record highs for the last three sessions of 2013, with traders saying the central bank was guiding the spot rate stronger to achieve a pre-determined full-year appreciation target. That pulled the spot rate to a series of four straight record highs, the latest one at 6.0500 per dollar on Thursday. With the new year now under way, however, traders expect yuan appreciation to return to the moderate pace that prevailed for most of last year. The yuan gained 2.9 percent in 2013, of which a full 0.4 percentage points occurred in the final three days of the year. "We've returned to hibernation mode," said a trader at a mid-sized commercial bank. Spot yuan changed hands at 6.0516 per dollar at midday on Friday, 0.01 percent weaker than Thursday's close. That came after the PBOC set its midpoint at 6.1039, 0.08 percent weaker than Thursday's fix. Despite the expected pause, traders say corporate demand remains tilted towards yuan purchases, as it was for most of 2013. They expect China's resilient trade surplus, as well as speculative inflows drawn by higher onshore yuan interest rates compared to rates in dollars and other currencies, to support yuan appreciation of around 3 percent this year. That forecast reflects the assumption that the PBOC will continue to intervene in the market sporadically to prevent overly rapid appreciation. Chinese leaders have pledged to reduce intervention in the foreign exchange market and let market forces play the dominant role in setting the exchange rate. 1/8IDP:nL4N0J42CP 3/8 Most market watchers believe reduced intervention would lead to swifter yuan appreciation, at least initially. Economists say a stronger yuan would aid China's efforts to rebalance its economy towards consumption, while helping to reduce friction with trading partners who have long complained that China undervalues its currency to boost export competitiveness.

The onshore spot yuan market at a glance:

Item Current Previous Change (pct) PBOC midpoint 6.1039 6.099 -0.08 Spot yuan 6.0515 6.0506 -0.01 Divergence from -0.86

midpoint* (pct)

Spot change ytd +0.04 Spot change since 2005 revaluation +36.77

*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 6.0488 0.04* Offshore non-deliverable 6.1150 -0.18**

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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(Additional reporting by Li Ran in BEIJING; Editing by Kim Coghill)