China's yuan weakens on corporate dollar demand, but state banks lend support

SHANGHAI: China's yuan eased on Tuesday dampened by corporate dollar demand and a weaker fixing, but losses were capped after major state-owned banks stepped in to prop up the Chinese currency.

The People's Bank of China (PBOC) set the midpoint rate at 6.7983 per dollar prior to market opening, the weakest since June 28, softer than the previous fix 6.7964.

The central bank's weaker guidance came after the US currency advanced in global markets overnight.

In the spot market, the yuan opened at 6.8030 per dollar and was changing hands at 6.8043 at midday, 13 pips weaker than the previous late session close and 0.09 percent softer than the midpoint.

"Depreciation expectations of the yuan are back. Corporate demand for the US unit is heavier today as companies believe purchasing dollars at the current yuan level is cost-effective," said a trader at a regional bank in Shanghai, noting companies are afraid the yuan will renew its weakening trend in the wake of the dollar's recent strength.

Multiple traders said strong corporate demand for the greenback had forced major state-owned banks to sell dollars in the onshore spot market. This had happened regularly over the past few months to prevent the yuan from falling too fast.

Traders believe the move by the state banks was part of an official effort to stabilise the Chinese currency and flush out overly bearish yuan positions.

Big banks were in the swap market selling one-year dollar contracts against onshore yuan, two traders said. The operations allow banks to obtain dollars at the short-end, and sell it in the spot market to support the Chinese currency.

Iris Pang, Greater China economist at ING in Hong Kong, said managing the yuan was a delicate balancing act for the government.

"The central bank won't let the CNY depreciate in the current environment due to worries about capital outflows," Pang wrote in a note on Tuesday.

"However, it can't let the CNY get too strong either, as this would weaken the export trade, which does contribute to foreign reserves."

China's foreign exchange reserves edged up in June for a fifth consecutive month, official data showed last Friday.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.54, flat against the previous day.

The global dollar index rose to 96.108 from the previous close of 96.022.

The offshore yuan was trading 0.02 percent weaker than the onshore spot at 6.8059 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 6.9635, 2.37 percent weaker than the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate.