China's yuan firms on state bank support

SHANGHAI, July 4 (Reuters) - China's yuan firmed against the U.S. dollar on Tuesday, with major state-owned banks selling the greenback in the onshore market that helped bolster the Chinese currency. The People's Bank of China (PBOC) set the yuan midpoint fixing at 6.7889 per dollar, weakening it by 117 pips or 0.17 percent from the previous day's fix at 6.7772. The move was its biggest one-day weakening in percentage terms since June 20. The weaker guidance followed a rise in the U.S. dollar overnight in global markets. But in spite of the weaker midpoint fixing, spot yuan traded stronger. The yuan opened at 6.7981 per dollar and was changing hands at 6.7972 at midday, 18 pips firmer than the previous late session close but 0.12 percent weaker than the midpoint. Traders said spot yuan was swinging in a thin range in morning trade, with major state-owned banks selling dollars at around 6.80 yuan per dollar. "Dollar sales by the big banks were pressing the market," said a trader at a Chinese bank. State-owned banks have offered dollar liquidity regularly over the past two months in what traders believe is part of official efforts to support the yuan from falling too fast. Another trader at a Chinese bank said market participants reduced their operations recently amid volatility in the Chinese yuan and amid frequent dollar liquidity by the state banks. Traders said companies continued with dollar purchases on Tuesday. June and July are traditional period for high corporate dollar demand as some Chinese companies purchase dollars to pay dividends to their shareholders overseas, they said. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.47, weaker than the previous day's 94.49. The global dollar index fell to 96.106 from the previous close of 96.218. The offshore yuan was trading only 1 pip firmer than the onshore spot at 6.7971 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 6.966, 2.54 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0409 GMT:


Item Current Previous Change PBOC midpoint 6.7889 6.7772 -0.17% Spot yuan 6.7972 6.799 0.03% Divergence from 0.12%


Spot change YTD 2.20% Spot change since 2005 21.76%


Key indexes:

Item Current Previous Change Thomson 94.47 94.49 0.0

Reuters/HKEX CNH index

Dollar index 96.106 96.218 -0.1

*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.


Instrument Current Difference

from onshore

Offshore spot yuan 6.7971 0.00% * Offshore 6.966 -2.54%

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 Andrew Galbraith; Editing by Jacqueline Wong)