SHANGHAI: China's yuan firmed against the US dollar on Wednesday, boosted by tight liquidity in the offshore market that pushed CNH borrowing costs to the highest in more than five months.

The CNH Hong Kong Interbank Offered Rate benchmark (CNH HIBOR) was set by the city's Treasury Markets Association (TMA) at 5.97968 percent for overnight contracts, the highest since June 2. That was more than 3.4 percentage points stronger than the previous fix of 2.57550 percent.

Traders said onshore spot yuan remained rangebound in early trade on Wednesday, but the rate was pushed higher after a rise in its offshore counterpart following tight liquidity.

"Structurally, the widening gap between the on-offshore RMB funding costs should be the real cause of the CNH liquidity squeeze," said Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong.

Prior to market opening on Wednesday, the People's Bank of China set the midpoint rate at 6.6290 per dollar, 66 pips or 0.1 percent firmer than the previous fix of 6.6356. But traders said Wednesday's fixing came in slightly weaker than market expectations.

In the spot market, the onshore yuan opened at 6.6314 per dollar and was changing hands at 6.6248 at midday, 57 pips firmer than the previous late session close and 0.06 percent stronger than the midpoint.

The offshore yuan was trading 0.05 percent firmer than the onshore spot at 6.6212 per dollar.

"The (onshore) market did not have strong one-way bets in either direction, while corporate demand and supply of the dollar were balanced in morning trade," said a Shanghai-based trader at a foreign bank, adding that a liquidity shortfall offshore offered support for its onshore counterpart.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.33, firmer than the previous day's 95.24.

The global dollar index fell to 93.915 from the previous close of 93.952.

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 6.7745, 2.15 percent weaker than the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate.