SHANGHAI: China's yuan eased slightly against the US dollar at midday on Wednesday, as corporate demand for the greenback outweighed a much stronger official fix.
With only one week to go until a key national leadership meeting, the authorities are keen to stabilise the Chinese currency, traders said.
Stability in the forex market would be a top priority as any disruption of the exchange rate and the economy is unwelcome ahead of and during China's major political event - the National Congress of the Communist Party, starting on Oct.18.
Prior to market opening on Wednesday, the People's Bank of China (PBOC) lifted its official yuan midpoint to 6.5841 per dollar, its highest level in three weeks.
The strong fix reflected spot yuan trade the day before and dollar movement in global markets overnight.
The move in the official guidance rate was the biggest one-day strengthening in percentage terms since June 1.
Wednesday's official midpoint was 432 pips or 0.66 percent firmer than the previous fix of 6.6273 per dollar on Tuesday.
In the spot market, the onshore spot yuan opened at 6.5780 per dollar and was changing hands at 6.5834 at midday, 16 pips weaker than the previous late session close but 0.01 percent firmer than the midpoint.
Traders said bank clients were taking advantage of cheaper dollars, and that dragged the yuan lower on Wednesday morning.
A possible widening of the yuan's trading band after the party congress has been widely discussed in the market this week, following central bank governor Zhou Xiaochuan's comment about continuing to reform the central bank's foreign exchange rate mechanisms.
"Although the current trading band is not much of a binding constraint on the CNY, it does indicate policy confidence in the currency, and the success of the recent strategy to reduce currency outflows," Rob Carnell, ING's head of research, Asia, said on Wednesday.
The spot rate is currently allowed to trade with a range 2 percent above or below the official fixing on any given day.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.24, weaker than the previous day's 96.32.
The global dollar index fell to 93.243 at 0455 gmt from the previous close of 93.29.
The offshore yuan was trading 0.07 percent firmer than the onshore spot at 6.5786 per dollar.
Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.7265, 2.12 percent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.