SHANGHAI: China's yuan was virtually flat on Wednesday, as the market took a cautious attitude after data the day before showed a fall in the country's full-year trade surplus and a marked slowdown in imports in December.
Spot yuan traded at 6.3148 in the late morning, virtually unchanged from Tuesday's close of 6.3150.
The People's Bank of China (PBOC) set the mid-point 16 pips higher at 6.3155 in response to a slight weakening of the dollar overnight, extending its recent tight link to the dollar index.
PBOC typically adjusts its mid-point in the opposite direction of the overnight dollar index.
Both the PBOC and market participants appear to be taking a cautious approach to the exchange rate in response to global uncertainty, which was further underlined by December trade released on Tuesday.
The data showed China's trade surplus declined to $155 billion for full-year 2011, down from $177 billion in 2010.
Traders say this yearly decline makes significant yuan appreciation less likely in 2012.
"The narrowing trade surplus means that supply and demand for renminbi are approaching a balance, so the appreciation pressure will be reduced," said a forex trader at a major state-owned bank in Shanghai.
In addition to reduced market pressure, traders also expect the reduced surplus will also lessen political pressure from China's trading partners to guide the yuan higher.
The trade data also provided some evidence that the Chinese economy is slowing markedly, which could lead Chinese policymakers to halt yuan appreciation altogether.
Import growth slowed sharply to 11.8 percent year on year, down from 22.8 percent in November. Exports were more resilient, rising 13.4 percent year on year in December, down slightly from 13.8 percent growth in October.
As monthly trade data is normally volatile, it is risky to draw conclusions from a single month. Some analysts blamed year-end factors in both China and its trading partners for the import decline.
On the other hand, an import slowdown may signal weaker exports down the road. A large portion of China's imports are intermediate components, which are processed in China and then re-exported.
If exports slow sharply in the first quarter of 2012, the central bank could act to hold the yuan steady or even intervene to guide its value lower.
In the offshore market, one-year non-deliverable forwards traded at 6.3200 by midday, implying a 0.8 percent depreciation over the next year, down slightly from 0.1 percent depreciation expectations implied at Tuesday's close.
The yuan has now appreciated 8.1 percent in nominal terms since it was de-pegged in June 2010. It has depreciated in 2012.
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