SHANGHAI: The yuan rose slightly against the dollar on Tuesday but was trading much weaker than the midpoint fixed by the People's Bank of China (PBOC), as Chinese companies do not expect the yuan to appreciate sharply any time soon, traders said.
The PBOC set a record high mid-point for the third straight session, a move seen aimed at letting the yuan move in a wider range, traders said.
The central bank appears to have changed tactics since the start of March in an effort to encourage two-way trading for the yuan/dollar exchange rate, as it tests the waters to allow the market a bigger say in the yuan's value.
China recorded a rare trade deficit in February, easing pressure on the yuan to rise, and that appears to have made the authorities more willing to let the market take a more active role in deciding the yuan's value, traders said.
"Chinese companies do not see a big potential for the yuan to appreciate this year nor a prospect for the currency to rise sharply any time soon," said a trader at a major Chinese state-owned bank in Shanghai.
"Exporters are tending to retain more dollars on hand this year compared with previous years. With less dollar supply in the market, the yuan trades weaker than the PBOC's midpoint these days."
Spot yuan was trading at 6.3102 versus the dollar at midday, slightly stronger than Monday's close of 6.3140 but much weaker than Tuesday's PBOC midpoint of 6.2840.
Monday's mid-point was 6.2858.
Though the PBOC has set its midpoint at a record high for the past three sessions, the yuan has not approached its record trading high of 6.2884 hit on February 10.
The midpoint - used by the PBOC to flag the government's intentions for the yuan's value - is the base rate from which the dollar/yuan rate can rise or fall 0.5 percent in a day.
OPPORTUNITIES VS RISKS
In the first half of March, the PBOC used its midpoint to guide the yuan weaker by 0.70 percent against the dollar. The fixing posted its biggest 11-session loss since the establishment of the China Foreign Exchange Trade System, the domestic market, in 1994.
But over the past eight sessions, the fixing's yuan value has risen 0.82 percent, the biggest eight-session gain since October 2010.
As the government eases its grip on the yuan and allows sharper volatility, more opportunities will emerge for short-term profits, but risks will also mount in the longer term, with yuan appreciation no longer a certainty.
Faced with an uncertain global environment, mainly due to the euro zone debt crisis and signs of cooling in China's economy, Beijing is likely to take a defensive strategy in its exchange rate policy and not let the yuan stage another big rise like last year's 4.7 percent appreciation, traders said.
Traders believe the government will allow the yuan to appreciate about 0.7 percent against the dollar in the first half of this year, guiding it to move in a relatively wide range of 6.25 to 6.35.
In the offshore non-deliverable forwards (NDF) market, the benchmark one-year NDFs implied a yuan depreciation of 0.77 percent in afternoon trade, widening from a 0.71 percent fall they implied at Monday's close.
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