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China's yuan set for best weekly gain in nearly three years

HONG KONG, June 13 (Reuters) - China's yuan rose to two-month highs against the dollar on Friday, fueling expectations that the central bank may allow the currency to rise for a while after stronger economic data. The yuan has gained 0.7 percent so far this week, breaking four weeks of losses and is set to record its best weekly gain since August 2011, encouraged by a series of strong midpoints this week. Spot yuan changed hands at 6.2082 per dollar near midday, up 0.17 percent from Thursday's close at 6.2185. The People's Bank of China (PBOC) set the yuan midpoint at 6.1503, up 0.02 percent from the previous day's 6.1516. "There will be more two-way volatility in the market, which after a long sharp depreciation of the yuan may mean the central bank will allow it to rise for a while," said a trader at a Chinese bank in Shanghai. The world's second-largest economy has had a slow start this year with depressing economic data dampening investors' risk appetite to go long on the currency and hold yuan assets. However, a slew of better-than-expected indicators in the past week and Beijing's commitment to launch stimulus measures to keep its economy growing at a stable level has inspired some confidence. China's new bank lending and money supply rose faster than expected in May, as the government ramps up policy stimulus measures to energize a slowing economy.

The data released on Thursday added to reassuring signs that the economy is pulling out of its soft patch -- first quarter growth of 7.4 percent was the slowest in 18 months - but the recovery appears patchy. China's total fiscal spending in May also surged nearly 5 percent to 1.3 trillion yuan ($208.8 billion), quickening sharply from a 9.6 percent rise in the first four months of the year. "Our view is that better economic data and international diplomacy are at play here," said Bank of America Merrill Lynch analysts in a note, referring to strong midpoints this week. The U.S.-China Strategic and Economic Dialog (SED) will be held in Beijing in early July, which is likely weighing on the setting of the fixing, as the government is keen to deflect criticism of currency manipulation, the analysts said.

The onshore spot yuan market at a glance:

Item Current Previous Change PBOC midpoint 6.1503 6.1516 0.02% Spot yuan 6.2082 6.2185 0.17%

Divergence from midpoint* 0.94%

Spot change ytd -2.49% Spot change since 2005 revaluation 33.32% *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 2 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 6.2099 0.04% * Offshore non-deliverable 6.2125 -1.00% 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 - US warns China over currency depreciation - Capital flows, improving trade to prop up yuan in H2 - Dim sum bonds mark record quarter in Hong Kong

- New quotas rekindle debate over dim sum market's future

- Flood of offshore yuan bonds may spark higher yields

KEY GRAPHICS - China hot money inflows moderate in early 2014 http://link.reuters.com/raz74t - The yuan trades weaker than fix, tests wider trading band http://link.reuters.com/qyx74t - China's yuan, other emerging mkt currencies vs dollar http://link.reuters.com/xyd46v - China's exports, imports, and trade surpluses GRAPHIC: http://link.reuters.com/qav68s - The yuan began depreciating on a trade-weighted basis in 2014 GRAPHIC: http://link.reuters.com/sed74t

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(Reporting by Michelle Chen; Editing by Jacqueline Wong)