China's yuan closed slightly higher against the dollar on Thursday, propelled by small-scale but urgent yuan demand ahead of the New Year holiday, while dealers said the central bank was largely letting the market go its own way in the thin year-end trade.
The market showed little reaction to news late on Wednesday that China would allow the yuan to be used for the settlement of trade between a handful of southern Chinese provinces and neighbouring economies on a trial basis - a baby step on the road to making the yuan an international currency.
The central bank set the yuan's mid-point against the dollar at 6.8366 before trade began on Thursday, up slightly from Wednesday's reference rate of 6.8397, after a sudden spurt of yuan demand pushed the currency moderately higher in late trade on Wednesday.
"The central bank was co-operative with the yuan's gain yesterday," said a dealer at a Chinese commercial bank in Shenzhen. "Anyway, the central bank is keeping the yuan stable, so it won't care about small rises or falls."
Spot yuan closed at 6.8313 against Wednesday's close of 6.8397. Dealers said the yuan's gain in thin trade ahead of the New Year holiday late next week had little significance in terms of the market's future direction, with several saying the yuan would still be confined mostly to a tight range around 6.8500 in the near term, awaiting fresh leads.
They said they were similarly unimpressed by the yuan's modest gains in the offshore non-deliverable forwards market during the Christmas break. Offshore one-year dollar/yuan NDFs fell slightly to 7.0736 bid on Thursday from 7.0820 at the close on Wednesday.
Their latest level implied yuan depreciation over the next 12 months from the day's spot mid-point of 3.35 percent, less than the 3.42 percent implied at Wednesday's close. China's State Council, or cabinet, said late on Wednesday afternoon that the yuan could be used for the settlement of trade between the factory-rich Pearl River and Yangtze River deltas and the Chinese territories of Hong Kong and Macau, on a trial basis.
It also said that members of the Association of Southeast Asian Nations would be permitted to use yuan in their trade with China's provincial regions of Guangxi and Yunnan.
At present, Chinese and foreign firms that do business together denominate the vast majority of their trade in dollars and the rest in other major currencies such as the euro. Beijing has moved only gradually to expand the yuan's use beyond its borders for fear of attracting large flows of speculative "hot money", but it appears to have become somewhat bolder as its economy slows sharply and exporters struggle due to the global financial crisis.
"It is clear to the market that China has ambitions of gradually making the yuan an international currency," said a dealer at a major European bank in Shanghai. "But this goal will take years to fulfil. So will China's aim of making the yuan a fully convertible currency."