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China's yuan firms, academics urge Beijing to loosen grip

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China's yuan firmed slightly against the US dollar on Tuesday, buoyed by its firmer offshore counterpart and as corporates eased off heavy US dollar purchases this week.

[SHANGHAI] China's yuan firmed slightly against the US dollar on Tuesday, buoyed by its firmer offshore counterpart and as corporates eased off heavy US dollar purchases this week.

The onshore market has shown more stability, with short sellers shying away from shorting the currency since the authorities engineered a jump in offshore borrowing costs earlier this month, but traders say sentiment remains weak on views the yuan may soon resume its downward trend.

The People's Bank of China set the midpoint rate at 6.8992 per US dollar prior to market open, weaker than the previous fix 6.8874.

The spot market opened at 6.9033 per US dollar and was changing hands at 6.8971 at midday, 34 pips firmer than the previous late session close and only 0.03 per cent softer than the midpoint.

"The market was quite stable and balanced in the morning," said a Shanghai-based trader at a Chinese bank, noting companies were waiting for better quotes to purchase the greenback.

"A stronger offshore yuan and the continued consolidation in the US dollar have dampened corporate dollar purchases."

Traders were reluctant to sell onshore spot too aggressively given stronger offshore rates and expectations that conditions could be tight before the week-long Lunar New Year.

The spread between onshore and offshore yuan has eased to near 400 pips, narrowing from around 1,000 pips in early January.

As of midday, offshore yuan was trading 0.57 per cent firmer than the onshore spot at 6.8583 per US dollar.

The market was also awaiting clearer direction on the yuan, ahead of a new US administration in Washington this week and with China's economic growth under greater scrutiny.

"I believe the market will have a clearer picture at least in the post-Lunar New Year holiday, when the US President-elect Donald Trump has taken office and announced his policies," said another trader at a foreign bank, suggesting weak sentiment would likely persist till the beginning of February.

Liquidity usually thins ahead of the Lunar New Year holiday, which will see markets shut from Jan 27 to Feb 2.

China will lower its 2017 economic growth target to around 6.5 per cent from last year's 6.5-7 per cent target range, policy sources told Reuters, reinforcing a policy shift from supporting growth to pushing reforms to contain debt and housing risks.

Uncertainty over the yuan was also exacerbated by a rare public debate among academics advocating that the authorities push forward a free float for the currency.

Yu Yongding, a scholar at the China Academy of Social Sciences and former central bank adviser, said on Tuesday that China should overcome the "irrational fear" of allowing the Chinese yuan to float freely.

On Monday, Xiao Lisheng, a senior finance researcher with the Chinese Academy of Social Sciences, wrote in the official China Securities Journal suggesting the government stop intervening in the foreign exchange market, devalue the yuan and let it float freely to restore stability.

China's central bank sold a net 317.8 billion yuan (S$65.64 billion) worth of foreign exchange in December, continuing efforts to support the sliding yuan.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.04, weaker than the previous day's 96.13.

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 7.1542, 3.56 per cent weaker than the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate.


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