Yuan eases, but state banks seen intervening offshore

SHANGHAI (Reuters) – China’s yuan weakened on Wednesday as the dollar strengthened in global markets and after activity in the country’s factory sector shrank unexpectedly to a 6-1/2-year low in September.

Offshore yuan, however, trimmed earlier losses due to intervention from state banks, trade sources told Reuters.

Before the market opened, the People’s Bank of China set the midpoint rate at 6.3773 per dollar, 0.08 percent weaker than the previous fix of 6.3721.

The spot market opened at 6.3799 per dollar and was changing hands at 6.3840 by 0240 EDT, 0.13 percent weaker than the previous close.

Offshore yuan was at 6.4282, 0.15 percent softer than the previous close. It trimmed some of its earlier losses after it weakened by as much as 0.24 percent around mid-morning. But offshore yuan was still trading 0.69 percent weaker than the onshore spot rate.

Trading sources said Chinese state-owned banks intervened after the unexpectedly weak preliminary Manufacturing Purchasing Managers’ Index (PMI).

The PBOC typically uses state-owned banks to trade on behalf of itself to intervene in trading to influence the yuan’s value.

“It appears there is an adjustment in tactics by the central bank to let the yuan move more freely onshore of late while focusing more on offshore markets,” said a trader at a European bank in Shanghai.

Traders said that the preliminary PMI survey had less impact on the onshore market.

“The authorities seemed to accept a moderate depreciation of the yuan more recently,” said a trader at a Chinese commercial bank in Shanghai.

That lenience has allowed the onshore yuan to move more in line with market supply and demand this week, the trader and others said.

The PBOC scaled back onshore intervention amid comments on Tuesday by Chinese President Xi Jinping that China would push forward market-based reform of its currency regime and make the yuan convertible on the capital account over time.

Later that day, banking industry sources told Reuters that China’s central bank had completed drafting regulations for an international payments system that would facilitate greater usage of the yuan globally.

The central bank stepped up its intervention in yuan trading for a few weeks to cushion the economy against the unexpected aftermath of its abrupt devaluation of the yuan in mid-August.

After the intervention, trading turned sluggish and the market lost interest in pricing the yuan aggressively, choosing instead to follow the central bank’s guidance. That has made the onshore market less sensitive to economic data, such as the PMI, traders said.

The yuan market at a glance:

ONSHORE:

Item Current Previous Change

PBOC midpoint 6.3773 6.3721 -0.08%

Spot yuan 6.384 6.376 -0.13%

Divergence from 0.11%

midpoint*

Spot change ytd -2.82%

Spot change since 2005 29.64%

revaluation

*Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People’s Bank of China (PBOC) allows the exchange rate to rise or fall 2 percent from official midpoint rate it sets each morning.

OFFSHORE CNH MARKET

Instrument Current Difference

from onshore

Offshore spot yuan 6.4282 -0.69%

*

Offshore 6.602 -3.40%

non-deliverable

forwards

**

*Premium for offshore spot over onshore

**Figure reflects difference from PBOC’s official midpoint, since non-deliverable forwards are settled against the midpoint. .

GRAPHICS:

The yuan in trade-weighted terms http://link.reuters.com/sed74t

The spot market versus the trading band http://reut.rs/1MhsqOi

(Reporting by Lu Jianxin and Pete Sweeney; Editing by Jacqueline Wong)