SHANGHAI: The yuan fell slightly versus the dollar on Thursday after the People's Bank of China set a weaker midpoint for a fourth day, letting the fixing drop 0.41 percent in its biggest four-day fall since August 2010.
Traders said the central bank appears to have used the dollar's recent strength to test waters for more flexible two-way trading of the yuan/dollar exchange rate, and the trend was likely to continue in the near term.
But they were quick to add that they did not expect the government to allow the yuan to depreciate this year. Many believe the government sets undisclosed targets for the yuan's exchange rate to help it manage the economy.
The authorities have been walking a policy tightrope on yuan appreciation. They face pressure for faster appreciation from trade partners -- especially the United States -- clamouring for relief from relentless trade imbalances, as well as pressures to improve its economic structure to be less reliant on exports.
"Officials have recently made it clear that the government will gradually allow the yuan to move in a wider range, a move that will create two-way trading for the currency," said a trader at a Chinese commercial bank in Shenzhen.
"But temporary pull-backs from time to time do not mean that the yuan will depreciate. Few trading in this market expect yuan depreciation will be on the PBOC's cards this year."
Many traders retain their forecast for the yuan to appreciate around 0.7 percent for the first half and 3 percent for all 2012.
Spot yuan was trading at 6.3125 versus the dollar at midday on Thursday, slightly weaker than Wednesday's close of 6.3099 after the PBOC set the midpoint at 6.3235 compared with Wednesday's 6.3213.
TWO-WAY TRADING
China has been hoping for a long time to promote greater two-way flexibility in the tightly-controlled yuan.
But facing heavy pressure from the United States as China continues to posts large bilateral trade surpluses, the Chinese government often finds itself in a difficult position to let the yuan pull back significantly.
The yuan has appreciated more than 30 percent since July 2005 when Beijing conducted a landmark revaluation of the currency. Speculation has been on the rise that China will eventually let the yuan pull back after so much appreciation.
Such speculation started to gain momentum in the fourth quarter of last year, when growth in China's exports began slowing because global economic conditions were worsening as a result of the debt crisis in Europe, the biggest single destination for China's exports.
Chinese exports increased by an estimated 7 percent in the first two months of this year from year-ago levels, China's Minister of Commerce told a news conference on Wednesday, easing from 13.4 percent in December, which was already the slowest pace of growth in more than two years.
PBOC governor Zhou Xiaochuan said this week that conditions were now ripe for the yuan's exchange rate to float more widely, sending a signal that the government may consider letting the yuan stage more two-way trading from now on.
His comments coincided with the fact that the PBOC allowed the yuan's mid-point to stage its biggest single-day percentage fall in 16 months, of 0.22 percent, on Monday, a move some traders believe signaled that the central bank was testing waters for a wide trading band for the yuan.
China has also recently expressed more willingness to reform its rigid currency system, with the State Administration of Foreign Exchange pledging to steadily promote the yuan's reforms under the capital account this year.
In the offshore non-deliverable forwards (NDF) market, the benchmark one-year NDFs implied yuan appreciation of 0.35 percent around midday, compared with 0.31 percent they implied at Wednesday's close.
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