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China's yuan again slightly weakens, corporate dollar demand strong

SHANGHAI, June 27 (Reuters) - China's yuan, which has weakened against the U.S. dollar the past eight days, slipped again on Tuesday after the central bank fixed its official midpoint at the lowest level in nearly a month. The People's Bank of China set the midpoint rate at 6.8292 per dollar prior to market open, the weakest since May 31, softer than the previous fix 6.822. In the spot market, the yuan opened at 6.8387 per dollar, then weakened to 6.8445 and swung between gains and losses before reaching 6.8417 at midday, 2 pips weaker than the previous late session close and 0.18 percent softer than the midpoint. A Shanghai-based trader said corporate dollar demand triggered by seasonal factors remained strong, and could persist till July. Traditionally, June is a period for of high corporate dollar demand. This has contributed to the Chinese currency giving back more than half of its 1 percent-plus gain in late May - a gain that many believe was triggered by authorities. Some traders also said the spot rate's approach toward the 6.85 level offered an incentive for selling dollars to lock in profits. The central bank's introduction of a "counter-cyclical factor" caused what one economist called an "unintended consequence" that the gap between the midpoint fixing and the trading day's official close at 0830 GMT widened again. This widening gap "increased the basis risk for RMB again. The persistent gap may not bode well for sentiment," Tommy Xie, economist at OCBC Bank in Singapore said. "Clearly, counter-cyclical factor is not a panacea to remove RMB depreciation pressure when the dollar strengthens although it may partially alleviate some pressure." On Tuesday, Chinese Premier Li Keqiang reiterated at the World Economic Forum (WEF) that no restriction would be implemented on foreign firms' repatriating profits from China.

Capital outflows were a big concern for the government last year as it attempted to put the economy back on track and keep the yuan stable without exhausting its foreign exchange reserves. The pressure on capital exodus has somewhat eased this year. Foreign-exchange reserves have expanded the past four months. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 93.94, firmer than the previous day's 93.91. The global dollar index fell to 97.384 from the previous close of 97.426. The offshore yuan was trading 0.08 percent weaker than the onshore spot at 6.8471 per dollar. Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.999, 2.43 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0424 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.8292 6.822 -0.11% Spot yuan 6.8417 6.8415 0.00% Divergence from 0.18%

midpoint*

Spot change YTD 1.53% Spot change since 2005 20.97%

revaluation

Key indexes:

Item Current Previous Change Thomson 93.94 93.91 0.0

Reuters/HKEX CNH index

Dollar index 97.384 97.426 0.0

*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

Instrument Current Difference

from onshore

Offshore spot yuan 6.8471 -0.08% * Offshore 6.999 -2.43%

non-deliverable forwards

**

*Premium for offshore spot over onshore

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

(Reporting by Winni Zhou and David Stanway; Editing by Richard Borsuk)