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Yuan erases gains as c.bank adviser eyes rate of 6.6 against dollar

SHANGHAI, Jan 8 (Reuters) - China's yuan rose on Monday morning after the central bank set a stronger midpoint setting but the gains were erased in the afternoon as the market weighed comments by an adviser to the People's Bank of China on the currency's longer-term level. Sheng Songcheng said over the weekend that the yuan had strengthened recently on the back of dollar weakness and rising interest rates in China's financial markets, but these factors would recede, and the yuan will likely stabilize to around 6.6 against the greenback in the longer-term. Prior to market opening on Monday, the PBOC set the midpoint rate at 6.4832 per dollar, firmer than the previous fix of 6.4915. In the spot market, the yuan rose to as much as 6.4760 against the dollar, before pulling back to 6.4869 at 0700 GMT. The yuan rose against the dollar in each of the past four weeks, aided by China's solid economic data and tighter liquidity in the onshore market. China's benchmark 10-year government bond yield hovers near 4 percent, compared with 2.478 percent for the 10-year U.S. Treasuries. As capital outflow fears recede, China's foreign exchange reserves rose for 11 months in a row to their highest level in more than a year in December, blowing past economists' estimates. "Going onwards, the steady FX reserves and RMB outlook would warrant China's policy to open up onshore financial markets and encourage more capital inflow," wrote Ken Cheung Kin Tai, an analyst at Mizuho Bank Ltd. There are already signs of Beijing loosing grip on capital controls while accelerating yuan globalization. The PBOC said on Friday it would encourage companies to use the yuan in cross-border transactions and facilitate foreign investors' use of the currency in direct investments in China.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.07, flat with the previous day's 96.07. The global dollar index rose to 92.127 from the previous close of 91.949. 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 6.6195, 2.06 percent away from the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 6:57AM GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.4832 6.4915 0.13% Spot yuan 6.4857 6.4887 0.05% Divergence from 0.04%

midpoint*

Spot change YTD 7.11% Spot change since 2005 27.61%

revaluation

Key indexes:

Item Current Previous Change Thomson 96.07 96.07 0.0

Reuters/HKEX CNH index

Dollar index 92.127 91.949 0.2

*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 6.486 0.00% * Offshore 6.6195 -2.06%

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 Samuel Shen and John Ruwitch; Editing by Richard Borsuk)