China's yuan edges up as PBOC reduces intervention

SHANGHAI: China's yuan firmed slightly against the dollar on Wednesday as the central bank appeared to reduce its intervention in the market, having engineered a sudden depreciation of the yuan since last month, traders said.

Dollar purchases by state banks -- a sign of intervention by the People's Bank of China (PBOC) -- appeared to subside this week, traders said.

Spot yuan stood at 6.1371 per dollar at midday, 0.1 percent stronger than Tuesday's close.

The strengthening spot rate contrasted with the central bank's midpoint, which was fixed at 6.1257 on Wednesday, 0.03 percent weaker than Tuesday and at the weakest level in three months for a second day in a row.

"Fewer dollar purchases by state banks permitted the yuan to rise slightly in line with a lingering oversupply of dollars in the market," said a trader at a European bank in Shanghai.

"That means the PBOC may be happy with the yuan's current value," he said. "As for the PBOC setting another three-month low midpoint, it appears the central bank hopes to eventually bring its base rate closer to the spot rate."

Absent another surprise from the central bank, the yuan is likely to move within a 400-pip range around 6.15 against the dollar, traders said.

In the longer term, however, the world's second-largest economy still faces heavy capital inflows under both the current account and capital accounts, which means the Chinese currency still has potential to appreciate gradually, traders said.

The PBOC surprised global markets last month when it engineered a sharp decline in the yuan. Last week, the yuan suffered its biggest-ever weekly decline of around 0.9 percent, capping off its largest monthly loss - 1.4 percent - in February.

Traders reported that onshore and offshore speculators had built up large long yuan positions earlier this year, after the central bank surprised the market by letting the currency rise 2.9 percent in 2013. That far exceeded initial market expectations for an appreciation of only 1 percent.

But they said there were signs companies have become less aggressive in betting on the yuan's appreciation more recently after the PBOC-engineered depreciation.

Many economists have predicted the PBOC may also be testing waters for further currency reforms, such as a widening of the yuan/dollar trading band to encourage more two-way trading.

"Conditions for exchange-rate reforms are relatively good. We see a rare two-way fluctuation in exchange rate, which could be a prelude to reforms," Li Daokui, an academic and former PBOC adviser told reporters in Beijing on Wednesday.

"The floating band of yuan exchange rate could be expanded appropriately. And the process of capital-account convertibility could be quickened," he said on the sidelines of the opening session of China's annual parliamentary meeting.

Still, many traders believe the current band of 1 percent up or down is sufficient for trading and the PBOC has no need to rush to change it.

In particular, the band limits trading prices against the same day's midpoint, not the previous day's closing price, so even with a wider band, the central bank could continue to control the exchange rate by fixing its midpoint further from the spot rate, traders say.