SHANGHAI: China's yuan fell slightly on Wednesday as traders reported strong dollar demand from major Chinese oil companies and after the central bank set a lower midpoint to signal a brief pause in the currency's appreciation.
Spot yuan was trading at 6.1274 against the dollar, down from 6.1215 at Tuesday's close. Despite the fall, the yuan has hit record highs seven times this month and traded as high as 6.1210 on Monday, its best mark since China set up the domestic foreign exchange market in 1994.
Before Wednesday's trade began, the People's Bank of China (PBOC) fixed the yuan's midpoint at 6.1856, slightly weaker than Tuesday's midpoint of 6.1818. The yuan is allowed to rise or fall 1 percent in a day from the PBOC's base rate.
Wednesday's midpoint was set in line with a rally in the dollar index. After a slew of record high midpoints, the market was cautiously watching to see whether the PBOC would guide the yuan weaker on the back of dollar's global performance, traders said.
"Dollar demand from major Chinese oil firms made the yuan slightly more volatile today than most trading sessions and helped depress the currency," said a trader at a Chinese commercial bank in Shanghai.
"The market has also become increasingly cautious on whether the PBOC will change its focus for the midpoint after it has let the official rate to hit a slew of record highs."
State-owned Chinese oil giants are banks' most active corporate clients and also the biggest dollar buyers in the yuan market because China imports more than half of its crude demand and is now investing in foreign mining assets in a large scale.
In a sign of their demand on Wednesday, half-day volume reached $10.6 billion, or 85 percent of Tuesday's full-day volume of $12.5 billion.
The central bank has used the midpoint to guide the yuan to a series of record highs since early April as the government appears to be gradually moving to create conditions for a more flexible exchange-rate regime.
By letting the yuan rise, the PBOC hopes to find the range where supply and demand for dollars is balanced, traders said, but this has yet to be found as the currency continues to trade near the strong end of the trading band.
However, while the government is allowing a faster pace of yuan appreciation because inflows now dominate China's cross-border capital movements, it could also permit the yuan to depreciate sharply once the flow pattern reverses, traders said.
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