HONG KONG: China's yuan edged higher for a second consecutive day on Thursday, as some investors judged the currency's fall to a two-year low earlier this week as excessive.
But gains in the Chinese currency are likely to remain limited as China's economic growth slows this year.
China announced an economic growth target for this year of around 7 percent, signalling its lowest rate of expansion for a quarter of a century, and said it would increase government spending to support the slowing economy. China's economy grew 7.4 percent last year.
"There is some bottom fishing at these levels, but the overall trend remains weak," said a trader at a European bank in Hong Kong.
The People's Bank of China set the midpoint rate at 6.1528 per dollar prior to market open, weaker than the previous fix 6.1525.
The spot market was changing hands at 6.2671 at midday, a shade stronger than the previous close of 6.2709 and 1.86 percent weaker than the midpoint.
The spot rate is currently allowed to trade with a range 2 percent above or below the official fixing on any given day.
The offshore yuan was trading weaker than its onshore counterpart at 6.277 per dollar.
Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.3955, -3.79 percent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate, and now that the trading band has been widened to 2 percent in either direction, corporates are much warier of using the NDF to hedge given the basis risk inherent in them.
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