China central bank sets record high midpoint, but market holds back

SHANGHAI (REUTERS) - China's central bank set its strongest midpoint yet for the yuan on Tuesday after the dollar index plummeted in overnight trade, but while the spot rate also rose, it refrained from setting a record high.

The central bank set the official midpoint up 0.11 per cent at 6.1735 on Tuesday morning from Monday's 6.1806.

The spot yuan market, however, refrained from moving into the new territory allowed by the higher midpoint.

The exchange rate is allowed to rise or fall by 1 per cent from the midpoint on any day, but at midday the spot yuan was trading at 6.1287 per dollar, up 0.05 per cent from Monday's close and 0.73 per cent from the midpoint.

This extends a trend that began last week of the spot price gradually backing away from the strong side of the trading band.

Since April, the spot price has frequently traded over 0.9 per cent away from the midpoint, showing the People's Bank of China's midpoint was in effect leashing the market.

Traders said that cautious attitudes are beginning to take hold among some customers, causing them to buy more dollars, and that the long-running yuan rally may be reaching an inflection point.

Opinion articles in state media published on Tuesday also argued that a correction may be imminent.

A column on the front page of the official China Securities Journal said forex purchases by Chinese banks likely slowed significantly in May, indicating a diminished appetite for yuan.

Another column in the official Shanghai Securities News written by a member of the finance research department of the Shanghai Academy of Social Sciences said that the yuan is likely to decline significantly in the second half of the year.

Both articles highlighted the disconnect between economic data showing China's economic growth is slowing and the exuberance of the domestic currency market.