Yuan eases as China shows discomfort with recent gains

BEIJING: China's yuan eased slightly and traded just below a psychologically critical threshold on Tuesday amid signs the central bank is growing uncomfortable with the currency's recent rapid gains.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.3014 per dollar, 208 pips or 0.33% firmer than the previous fix 6.3222.

But the official guidance rate was weaker than market projections, traders and analysts said, and was 23 pips softer than Reuters' estimate of 6.2991.

Major state-owned banks were seen continuing to buy dollars in the onshore spot market, two sources said, to defend the psychologically important 6.31 per dollar.

"It appears that the central bank still doesn't want too rapid a rise in the yuan," said one of the sources.

The other source said authorities were keen to control the pace of gains ahead of an annual parliamentary meeting, which is set to start on March 5.

Chinese financial markets are usually stable during and before key economic and political events. State banks have proprietary accounts but also act on behalf of the central bank in the country's foreign exchange market.

The spot yuan opened at 6.3048 per dollar and was changing hands at 6.3119 at midday, 19 pips weaker than the previous late session close.

The local currency gained 0.8% to the dollar in Tuesday, becoming one of the best performing emerging market currencies, even as Russia's invasion of Ukraine roiled global financial markets.

The yuan's strength was supported by fundamental factors including a higher trade surplus and heavier capital inflows into Chinese assets against the geopolitical backdrop.

"We expect favourable capital flows to keep the yuan resilient, as long as China manages to limit the economic impact of its decision to remain on the fence regarding the Russian-Ukraine crisis," said Eugenia Victorino, head of Asia strategy at SEB. She expects the yuan to trade at 6.3 per dollar at end-2022.

By midday, the global dollar index rose to 96.893 from the previous close of 96.707, while the offshore yuan was trading at 6.3142 per dollar.