China's yuan firmed against the dollar on Thursday, after the central bank set a stronger guidance rate and traders suspected state-owned banks intervened to hold down volatility. The People's Bank of China set the midpoint rate at 6.4707 per dollar prior to market open, 0.07 percent firmer than the previous fix of 6.4754. In the spot market, the yuan opened at 6.4727 per dollar and was changing hands at 6.4714 by midday in range-bound trade, strengthening 0.16 percent from the previous late session close.
The offshore yuan was trading 0.18 percent softer than the onshore spot at 6.4829 per dollar. Traders believed strong demand for dollars was in part tempered by the presence of state-owned banks. "There was strong dollar demand in early morning trade," said a trader at a Chinese commercial bank in Shanghai. "But state banks were offering prices around 6.4760, which limited movement in the spot rate."
On Wednesday, a Reuters poll showed that China's foreign exchange reserves - the world's largest - likely fell for a fifth straight month in March, easing to $3.18 trillion from $3.2 trillion in February. The data may be released on Thursday. Settlement not affected by FX volatility The Chinese currency's recent decline has not affected corporate appetite for the yuan in cross-border trade settlements as they can still benefit from using the currency in trade transactions, an HSBC executive said on Thursday.
"We don't expect the percentage of yuan trade settlement in China's total trade to fall as benefits and opportunities to use the yuan are quite clear," Vina Cheung, global head of renminbi internationalisation in global payments and cash management at the bank, told Reuters. For Chinese companies, they do not need to manage FX risk if they use the yuan to settle trade; while for foreign companies that have China business, they may also find synergy to use the yuan by centralising their FX management, Cheung said.
Cheung expected yuan trade settlement to account for 30 percent of China's total trade in 2016-2017, rising to 50 percent by 2020. The yuan has lost more than 4 percent against the dollar in the past year and the market consensus is that it will continue to fall this year.