China's yuan edges lower despite firmer midpoint

China's yuan eased against the dollar on Wednesday, despite a firmer midpoint setting by the central bank. The People's Bank of China set the midpoint rate at 6.4936 per dollar prior to the market open, 0.05 percent firmer than the previous fix of 6.4971. In the spot market, the yuan opened at 6.4847 per dollar and was changing hands at 6.4901 at midday, easing only 0.03 percent from the previous close.
"During the past three days of trade, the yuan was trading a bit stronger than the midpoint, with state banks offering prices around the official fix, offsetting any surge in dollar demand," said a dealer at a Chinese commercial bank in Shanghai. While officials have said recently that two-way fluctuations in the currency will be allowed "within a reasonable range", and as determined by market demand, traders remain cautious.
Still, onshore one-year yuan/dollar deliverable forwards were quoted at 6.5812 around midday, implying expectations of a bigger depreciation over 12 months than seen in Tuesday's close of 6.5686. An official at the country's foreign exchange regulator said on Tuesday that China is studying a Tobin tax on transactions as a possible policy tool to curb capital outflows, even though such flows have eased in recent months.
Also on Tuesday, the Xinhua state news agency reported President Xi Jingping said that China is facing challenges and conflict as a result of the economy entering a "new normal" phase. In a related development, US Treasury Secretary Jack Lew said on Tuesday that China's transition to a more market-oriented economy "is going to be bumpy" but will influence the path of future global growth.
In offshore markets, the yuan was trading at 6.4929 per dollar by midday, ending a trend in the past week of trading stronger than its onshore counterpart, but still within a tight 30-pip range from onshore levels. Offshore one-year non-deliverable forwards contracts, considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.6675, 2.61 percent weaker from the midpoint.