[SHANGHAI] China's yuan advanced further against the US dollar on Monday after the central bank set its guidance at a near seven-month high, but the gains were capped on rising corporate demand for the greenback, traders said.

Last week was the yuan's best week since February 2016, as it gained 0.65 per cent against the US dollar - a sizable leap for a currency that normally trades in a wafer-thin range.

The yuan had weakened by 6.5 per cent last year.

The People's Bank of China set the midpoint rate at 6.7935 per US dollar prior to market open, firmer than the previous fix 6.8070.

The strength in the yuan midpoint followed losses in the US dollar after disappointing US employment data prompted investors to pare back expectations for US interest rate hikes.

The spot market opened at 6.8050 per US dollar and was changing hands at 6.8032 at midday, 53 pips firmer than the previous late session close but 0.14 per cent weaker than the midpoint.

Traders said the official fixing was set at a stronger level, but corporate demand for the greenback picked up in morning trade, which has limited the yuan from rising further.

"Spot (USD/CNY) prices were pushed up as dollar demand was stronger in the market," said a trader at a Chinese bank in Shanghai, adding June is a traditional peak period for US dollar demand.

Foreign firms usually start to repatriate profits overseas in June and domestic firms begin to purchase US dollars to square books ahead of the quarter-end.

Multiple traders said major state-owned banks sold US dollars in the market in morning trade, but said the amounts offered were less than those seen last week.

Aside from state banks buying, the yuan's surge last week was also partly attributable to higher yuan borrowing costs in Hong Kong, with overnight borrowing rate jumping to a high of 42.185 per cent on Thursday.

With the rates falling to normal level after liquidity stress eased, the offshore yuan weakened slightly on Monday. It traded at 6.7797 per US dollar at midday, compared with the previous close at 6.7741.

Hong Kong's overnight yuan borrowing rate fell to 3.14688 per cent on Monday, around 5.5 percentage points lower than the previous fix.

Separately, the yuan's value based on a trade weighted index against a basket of currencies showed its biggest weekly rise since July 2016.

The index rose to 93.16 last Friday, 0.83 per cent higher than a week earlier, according to official data from the China Foreign Exchange Trade System (CFETS).

The CFETS publishes index figures on a weekly basis.

REUTERS