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UPDATE 1-China c.bank relaxes yuan hedging rules as currency strengthens, capital outflows ease

capital outflows ease@

* China scraps required reserves for settling forward yuan positions

* Also stopped requiring foreign banks to put aside reserves for offshore yuan deposits in China (Adds details, market reaction)

BEIJING, Sept 11 (Reuters) - China's central bank on Monday took steps to lower the cost of hedging the yuan as capital outflows ease and the currency strengthens, suggesting authorities are anxious to quash one way bets on the yuan as exporters come under increasing strain.

The People's Bank of China has scrapped reserve requirements for financial institutions settling foreign exchange forward yuan positions, it said in an emailed statement to Reuters.

The central bank also said it has stopped requiring foreign banks to put aside reserves for offshore yuan deposits in China.

Reuters, citing sources with direct knowledge of the matter, reported the removal of the reserve requirement related to forward yuan contracts on Friday, and reported the change to the yuan deposit rules on Monday morning.

The PBOC said the changes were made in consideration of current market conditions, and that the yuan strength against the dollar this year reflected the improvement of the Chinese economy.

"The short term impact of this is that there are now fewer restrictions on banks dollar purchases," said Iris Pang, economist at ING, in a note to clients.

"One interpretation is that the pace of CNY appreciation has taken the PBoC, as well as the market by surprise. We believe that CNY appreciation will continue, but at a slower pace from now on."

China's central bank set the onshore yuan midpoint at 6.4997 per dollar on Monday, strengthening it beyond the key psychological 6.5 level for the first time since May 2016.

Despite the stronger midpoint, the offshore and onshore yuan were both trading below the 6.5 level on Monday.

The dollar also rose against the Chinese yuan, which pulled away from a 21-month high set on Friday. The yuan has gained over 7 percent so far this year, having more than made up the nearly 6.6 percent drop it suffered in 2016. (Reporting by Beijing Monitoring Desk and Elias Glenn; Editing by Shri Navaratnam)