SHANGHAI: The yuan was little changed against the dollar on Tuesday but continued a recent trend of trading far below the central bank's midpoint as traders reported that Chinese companies increasingly tend to retain dollars on hand.
Traders told Reuters that investors' sentiment towards the prospect of a yuan appreciation in the future had weakened greatly over the past few months, making exporters reluctant to sell their foreign exchange earnings to banks as they used to do for years since the yuan's landmark revaluation in July 2005.
With the yuan now under pressure to depreciate partly due to increasing dollar demand, the central bank has recently set a series of midpoints stronger than the yuan's trading level, as it seeks to keep the exchange rate relatively stable.
"Companies are no longer eager to sell dollars to banks, and that has tilted the balance of yuan/dollar demand in favour of the dollar," said a trader at an Australian bank in Shanghai.
"The government is also pushing more Chinese firms to invest outside the country, which has further pushed up dollar demand."
Spot yuan was trading at 6.3562 per dollar at midday, inching up eight pips from 6.3570 at Monday's close.
The PBOC fixed the midpoint at 6.3016 against the dollar, slightly weaker than Monday's 6.3005, reflecting a global dollar rally overnight.
PBOC CURRENCY PURCHASES WEAKEN
The PBOC and financial institutions bought a net 23.4 billion yuan ($3.68 billion) worth of foreign exchange in May, following a net sale of 60.6 billion yuan in April, according to Reuters calculations based on data published by the central bank on Tuesday.
However, a trader said the recovery in inflows was relatively weak.
"May forex purchase data was quite poor," said Liu Dongliang, a currency strategist at China Merchants Bank in Shenzhen. "For all 2012, forex purchases will drop sharply from the level of 2011."
Until very recently, the PBOC and banks tended to buy large amounts of dollars, averaging about $30-40 billion per month, to satisfy demand from domestic firms eager to exchange foreign currency received from trade for yuan, expecting the yuan to keep appreciating as it had since 2005.
But those expectations began to moderate in late 2011, partly because of a sharp slowdown in the domestic economy.
In May, the yuan posted its biggest monthly drop against the dollar on record, nearly 1 percent, partly in response to the strengthening of the US dollar in global markets, and partly in consideration of domestic factors.
China's economic growth slowed to a near three-year low of 8.1 percent in the first quarter. Many economists expect GDP growth to fall below 8 percent in the second quarter.
Offshore one-year non-deliverable yuan forward contracts changed hands at 6.4040 on Tuesday afternoon to imply a yuan deprecation of 1.6 percent against the dollar in next 12 months based on Tuesday's midpoint.
Offshore spot yuan traded at 6.3630 at midday, slightly weaker than the onshore spot level.
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