HONG KONG: China's yuan edged down against the dollar on Wednesday after the central bank set a weaker midpoint, shrugging off stronger-than-expected factory sector activity in February.
The flash HSBC/Markit Purchasing Managers' Index (PMI) inched up to a four-month high of 50.1 in February, a whisker above the 50-point level that separates growth in activity from a contraction on a monthly basis.
Economists polled by Reuters had forecast a reading of 49.5, little changed from January's final PMI of 49.7.
The People's Bank of China set the midpoint daily fixing at 6.1384 per dollar prior to market open, weaker than the previous fix 6.1330.
The spot market opened at 6.2570 per dollar and was changing hands at 6.2589 near midday, 38 pips weaker than the previous close and 1.96 percent weaker than the midpoint.
The spot rate is currently allowed to trade with a range 2 percent above or below the official fixing on any given day.
Offshore yuan was trading 0.20 percent weaker than the onshore spot at 6.2714 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 6.3885, or 3.91 percent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate, and now that the trading band has been widened to 2 percent in either direction, corporates are much warier of using the NDF to hedge given the basis risk inherent in them.
As a result, the market has lost liquidity in recent years and has frequently proven an unreliable measure of market sentiment.
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