SHANGHAI: The yuan closed slightly higher 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 are increasingly tending to retain dollars on hand.
Investors' expectation of yuan appreciation in the future had faded 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 closed at 6.3545 per dollar, edging up 25 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.
The monthly average net forex purchases in the first five months of 2012 was just 50.7 billion yuan, down sharply from 2011's average of 231.6 billion yuan a month and the 2010's average of 272.4 billion yuan.
"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."
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 6.4050 on Tuesday afternoon to imply a yuan deprecation of 1.61 percent against the dollar in next 12 months based on Tuesday's midpoint.
Offshore spot yuan traded at 6.3630, slightly weaker than the onshore spot level.
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