China's yuan inches higher, but policy divergence seen weighing

SHANGHAI: China's yuan edged higher against the US dollar on Thursday, lifted by a stronger official fixing, but traders expect gains will be limited as central banks elsewhere in the world start to scale back pandemic emergency stimulus programmes.

While Chinese officials recently moved to cool expectations of broad easing to boost the slowing economy, investors still expect more modest support measures, highlighting a growing policy divergence with other countries.

The People's Bank of China set the yuan's daily midpoint rate at 6.4615 per dollar prior to the market open, firmer than Wednesday's fix of 6.4674.

China's yuan edges up as PBOC official downplays imminent liquidity support

Spot yuan opened at 6.4630 per dollar and strengthened to 6.4606 around midday. The offshore yuan was barely changed at 6.4588.

"The yuan will remain rangebound in the near term. Beyond that we'll have to watch the mood of the ECB and the Fed. Tapering is getting closer and closer," said a trader at a foreign bank.

The European Central Bank is particularly in focus, with analysts expecting it to announce a token step towards reducing its emergency economic support later on Thursday.

Several Fed policymakers, meanwhile, signalled on Wednesday the US central bank remains on track to reduce asset purchases this year, despite rising COVID-19 cases and weak August jobs data.

In an indication of the challenges facing Chinese policymakers as they seek to support an uneven recovery, the country's factory gate inflation hit a 13-year high in August, driven by surging raw material prices despite Beijing's attempts to cool them, putting more pressure on manufacturers.

Other data over the coming weak is expected to a further softening in industrial output growth and retail sales.

Still, expectations for near-term easing in China have cooled after comments by the PBOC's vice governor on Tuesday, who said it will maintain prudent monetary policy and that liquidity supply and demand will remain basically balanced in coming months.

"In an environment of the market revising its pessimistic expectations around economic fundamentals and of restrictions on further loosening of monetary policy, we think it will be difficult for the Chinese 10-year yield to fall below its previous low around 2.8%," Ming Ming, fixed income analyst at CITIC Securities, said in a note.