SHANGHAI: The yuan held steady against the dollar on Tuesday, resisting a much anticipated correction after hitting record intraday highs during the previous two sessions, reflecting strong foreign exchange inflows into China, traders said.
Companies were eager to trade dollars for yuan on Tuesday, a move that traders said implied corporates have abundant dollars on hand, a condition likely caused by a healthy trade surplus for the world's second largest economy.
The People's Bank of China (PBOC) acted to prevent the dollar abundance from pushing up the yuan too much, pricing the yuan's midpoint - the base rate for the yuan to rise or fall 1 percent in a day - slightly weaker for the second day in a row.
The yuan traded far stronger than the PBOC's midpoint, a trend seen in the domestic market since mid-Septemer, when the United States announced the third round of quantitative easing (QE3), which has depressed the dollar's value, adding pressure for the yuan to appreciate.
"There appear to be lots of dollars in the market, with companies happy to settle them for the yuan. That implies China must have seen good net capital inflows recently," said a trader at a major Chinese state-owned banks in Beijing.
Spot yuan was trading at an intraday high of 6.2853 versus the dollar at midday, after moving in a narrow range and hitting a low of 6.2899, little changed compared with Monday's close of 6.2872.
The currency hit successive all-time highs during the previous two trading sessions and scored its biggest monthly gain this year in September partly because QE3 sparked interest in riskier assets such as emerging market currencies.
Before trading began, the PBOC set the yuan's midpoint at 6.3441, slightly weaker than Monday's 6.3426.
The central bank has set a slew of midpoints much weaker than the yuan's trading levels since mid-September, in what traders said was a sign that the authorities are acting to prevent renewed speculation on yuan appreciation after QE3.
"Recent midpoint levels imply that the PBOC's stance towards the yuan's value has changed, moving from a control of yuan deprecation earlier in the year to a curb of appreciation now," said a dealer at a foreign bank in Shanghai.
"As such, the yuan should have limited potential to rise sharply, in particular when China's exports remain sluggish."
China's exports grew 2.7 percent year-on-year in August, below the 3 percent forecast in a Reuters poll and much weaker than an official target of 10 percent increase for all 2012.
The government will announce trade data for September on Oct. 13 and gross domestic product growth for the third quarter on Oct. 18.
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