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UPDATE 2-Yuan suffers biggest weekly loss as PBOC punishes speculators

* Yuan nearly hits weak end of 1 pct trading band Yuan suffers biggest weekly loss around 0.9 pct

* More weakness seen as authorities stamp out speculative money

* FX market reform measures expected in March

HONG KONG, Feb 28 (Reuters) - China's yuan suffered its biggest weekly loss on record on Friday, as the central bank stepped up its intervention to weaken the currency ahead of a key government meeting next week which may be used as a platform to unveil more market reforms. Directed at squeezing out speculators betting on continued yuan gains, the central bank has set about actively weakening its currency since mid-last week by using a mix of weak daily fixings and asking its agent banks to buy dollars. The sudden slide in the yuan has added to global investor nervousness about China's slowing economy, high levels of local government debt and an increasingly risky shadow banking system. The intervention reached a frenzied pitch on Friday, with the onshore yuan falling by its daily one percent limit against a midpoint fixing for the first time since July 2012. Some analysts expect more weakness in the coming days. On Friday, the yuan briefly weakened to 6.1808 per dollar in intraday trade, more than 0.8 percent below the previous close despite the central bank fixing the yuan slightly stronger at 6.1214 per dollar. The Chinese currency closed at 6.1450 per dollar, down 0.27 percent from the previous day's close at 6.1284. It racked up its biggest-ever weekly loss of around 0.9 percent and largest monthly loss of 1.4 percent. "I think there is a good chance for spot yuan to break the 6.20 psychologically important level, and it can happen as early as next week," said Kenix Lai, a senior market analyst at Bank of East Asia. "Only fast depreciation of the yuan can stamp out speculative money betting on yuan appreciation." Stepped-up efforts by the People's Bank of China to actively weaken the currency has led the yuan to a dramatic weakening cycle that many analysts believe may be a prelude to more foreign exchange market reforms including widening a daily trading band at an annual parliamentary meeting next week. While the yuan has been allowed to move in a 1 percent trading band against the U.S. dollar on either side of the central bank's daily reference rate since April 2012, it has mostly hugged the stronger end of the band. As a relatively low-risk, high-yield currency that has gained more than 35 percent against the dollar since it was revalued in 2005, the Chinese yuan has become a growing favourite among international investors. The yuan has firmed every year against the dollar since 2010 with recent gains coming amid very little volatility and despite widespread weakness among emerging market currencies, fuelling growth of speculative capital flows. Those hot-money inflows -- UBS estimates that amount at more than $150 billion in 2013 -- have complicated the task of the central bank's policy management as it seeks to curb the growth of shadow banking activities. The yuan's dramatic fall since last week is aimed at stamping out those speculative plays. "Have you changed your expection of the yuan to depreciation? If not, I suggest changing it as soon as possible. I have changed mine and think it will stay weak for the next three months," said a trader at a Chinese bank in Shanghai.

RISKS GROWING China's weakening of the yuan over the past 10 days has exposed risks created by the rapid growth of offshore derivative products, with holders seen potentially facing billions of dollars of losses if the currency keeps falling. Bankers say the buyers of these leveraged bets -- and Deutsche Bank estimates $100 billion have been sold this year alone -- have largely been Chinese companies with large dollar receivables, who saw the products as a way to earn some extra income given the seemingly inexorable rise of the yuan. Regarding the yuan's recent sharp decline, China's foreign exchange regulator has launched an investigation into its possible impact on foreign exchange transactions at domestic banks and companies, banking sources said on Thursday.

Despite the slump in the past two weeks, a rare phenomenon in its history, analysts do not think it will be the trend in the long term. The world's second-largest economy is still under pressure from heavy capital inflows both under the current account and the capital account. Higher interest rate levels and better economic fundamentals will continue to attract fund inflows. The market is keeping a close eye on the National People's Congress to be held from next Wednesday, as traders believe it may be the time the central bank announces important policies on the foreign exchange market.

The onshore spot yuan market at a glance:

Item Current Previous Change PBOC midpoint 6.1214 6.1224 0.02% Spot yuan 6.145 6.1284 -0.27% Divergence from midpoint* 0.39% Spot change ytd 1.39% Spot change since 2005 revaluation 34.69%

*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 spot yuan changed hands at 6.1205,

down 0.33 percent from Thursday's close at 6.1006.

The offshore yuan market at a glance:

Instrument Current Difference from

onshore

Offshore spot yuan 6.1200 0.41% Offshore non-deliverable 6.1559 -0.56%

forwards

*Premium for offshore spot over onshore

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

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KEY DATA POINTS - Yuan is positive outlier compared with plunging emerging market currencies GRAPHIC:- Hot money tracker: Hot money inflows slowed to a trickle in December 2013 GRAPHIC:- China's trade surpluses mainly driven by weak imports rather than strong exports. GRAPHIC:- Corporate FX behavior reflects yuan appreciation expectations. GRAPHIC:- Despite relatively stable dollar/yuan exchange rate, the yuan is appreciating on a trade-weighted basis. GRAPHIC:>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>