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Yuan rises slightly in minimal volatility

SHANGHAI, Jan 27 (Reuters) - China's yuan rose mildly on Monday after the dollar stayed flat, and Chinese markets prepared to shut down for a week-long holiday that begins on Friday. The central bank set the midpoint guidance rate at 6.1022 per dollar, and the spot rate traded at 6.0482, indicating sustained bullish sentiment and within range of its record-high of 6.0406. The offshore market also remains bullish, with the offshore yuan in Hong Kong changing hands at 6.0397 per dollar. Rising interest rates inside China, engineered by the People's Bank of China (PBOC) to encourage systematic deleveraging, are encouraging domestic companies to issue yuan-denominated bonds offshore in Hong Kong. However, analysts are concerned that as the mainland markets open to foreign money, capital will increasingly seek to invest in onshore fixed income at the expense of the much-smaller dim sum market's development. A trader at a joint-stock bank in Beijing said the market was seeing resistance at 6.0460 per dollar, and added that although there was space for more appreciation going forward, he believed the market would stay flat in the short term. China's foreign exchange regulator said on Friday that the country faced pressure from net capital inflows in recent months, as money seeks to enter the country to cash in on further yuan appreciation. Traders have predicted that the currency will rise by 2-3 percent in 2014. But Guan Tao, head of the department of international payments at the State Administration of Foreign Exchange (SAFE), said at a news conference that China can cope with possible capital outflows caused by U.S. tapering.

The onshore spot yuan market at a glance:

Item Current Previous Change PBOC midpoint 6.1022 6.1035 0.02% Spot yuan 6.0482 6.0488 0.01% Divergence from -0.88%

midpoint*

Spot change ytd 3.01% Spot change since 2005 revaluation 36.84%

*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 * 6.0397 0.14% Offshore non-deliverable 6.119 -0.27% 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 - New quotas rekindle debate over dim sum market's future

- Flood of offshore yuan bonds may spark higher yields

- 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 late 2013 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 Jacqueline Wong)