SHANGHAI: The Chinese yuan edged higher on Thursday, driven by banks selling off dollars they had been compelled to retain through the end of July to meet new regulatory requirements, traders said.
Spot yuan changed hands at 6.1264 per dollar near midday, 0.04 percent stronger than Wednesday's close of 6.1289.
In new rules announced in May and implemented at the end of June, China's foreign exchange regulator set stricter limits for banks' open positions to curb speculative hot money inflows into China disguised as foreign trade.
Banks whose foreign-currency loan-to-deposit ratio (LDR) exceeds the reference rate of 75 percent for Chinese banks and 100 percent for foreign banks are subject to more restrictions, making it worthwhile for them to stock up on foreign exchange toward the end of the month, and offload at the start of the next month.
"The new LDR-related position limits push banks to keep more dollars on hand than they may want at the end of a month," said a dealer at a Chinese commercial bank in Shanghai.
"They sell the unwanted dollars in the first one or two days of a month," he said. "Going forward, the new policy will support the yuan slightly at the start of the month, but any rally based on that cycle will not last."
A dealer at a European bank said the yuan market has lost direction because the central bank's midpoint settings have not given a firm guidance.
The People's Bank of China (PBOC) set its official midpoint at 6.1778 on Thursday, little changed from Wednesday's 6.1788.
Dealers predict the yuan will move in a tight range between 6.13/14 in the near term, as the government moves to hold the currency relatively stable in order to avoid undermining export competitiveness as China's economic growth slows.
The world's second-largest economy expanded at an annual rate of 7.5 percent in the second quarter, down from 7.7 percent in the first quarter.
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